Trump is completely wrong about the U.S. trade deficit

By Mark Perry, in the Los Angeles Times. Excerpts:

"Virtually all economists support free trade and oppose protectionism. For example, a 2014 University of Chicago survey found that 93% of the country's top economists agreed with the statement “Past major trade deals have benefited most Americans” and none disagreed (7% were uncertain)."

"Let's start with two basic economic principles. First, countries don't engage in trade with each other — only businesses and consumers do. Second, when individuals engage in a voluntary market exchange, both parties — the buyer and the seller — are almost always made better off, because both parties get something they want. Trade is win-win, not win-lose as so many politicians these days would have us believe.

To understand how economically backward Trump's position is on trade, imagine him standing in the parking lot of a Walmart, Home Depot or Best Buy and shouting to Americans as they leave with their merchandise, “Hey, you just got absolutely crushed by those merchants who sold you cheap products made in China, Japan and Mexico. People overseas are now laughing at you.” That's ridiculous. Consumers who voluntarily purchased those products, and who probably said “thank you” to the cashier as they left, did so because they valued the merchandise they selected more than the dollars they left behind.

When American businesses and consumers voluntarily purchase more products from China than Chinese businesses and consumers buy from us, it does lead to a U.S. trade deficit with China. But the trade deficit can't accurately be referred to a “loss,” because it's based on millions of mutually agreeable individual exchanges that took place between a willing seller and a willing buyer.

In fact, you could make a strong case that China “lost” last year on trade with America, not vice versa. After all, we acquired $482 billion of merchandise made in China and they acquired only $116 billion of merchandise made in the U.S., for a net merchandise surplus of $366 billion in our favor. China “lost” a net amount of $366 billion of goods that ended up being consumed and enjoyed by Americans.

It would also be accurate to say that China gained a net amount of $366 billion worth of U.S. currency, the exact amount of the trade deficit. But what happened to those dollars? They aren't sitting idly somewhere. On the contrary, they quickly came back into the U.S. as a capital inflow to purchase America's financial assets like corporate stock and bonds, real estate, bank deposits and Treasury securities, and as foreign direct investment in America's factories and businesses.

What Trump and the general public don't seem to understand is that once we account for all of the cash inflows and cash outflows every year for both merchandise and financial assets, America's trade deficit is offset by a corresponding “foreign investment surplus,” and there is no net loss.

To paraphrase economist Don Boudreaux, for Trump and the media to constantly lament America's trade deficit is to lament the fact that foreigners are eagerly investing hundreds of billions of dollars in America every year. We shouldn't think of trade deficits as losing to countries such as China, but rather as “inflows of foreign investment capital that strengthen America's economy.”

Economists almost universally agree that trade increases our prosperity and standard of living. Certainly there will always be short-run costs to trade — some American businesses may close and some workers may lose their jobs — but the significant benefits of trade always are much greater than the costs, making us stronger economically in the long run."