Featured, Free Trade

A Trade Deficit is Not a Budget Deficit. It’s Also Not Like Salad Dressing.

Donald Trump doesn’t know Adam Smith from Adam. Or salad dressing and dressing rooms. Or what dire straits the country would be in if his protectionism were to succeed.

Speaking to a rally of true believers, then-candidate Trump mocked people worried that his proposed tariffs and taxes would start a trade war.

“Trade war?!” he sniffed, the extra exclamation point dripping from his scowling smirk. “We’re losing $500 billion in trade with China. Who the hell cares if there’s a trade war?!”

Our president seems to think that a “trade deficit” is the same as a “budget deficit.” That’s like thinking that salad dressing should only be stored in dressing rooms. The words are the same, yes, but the meaning is so different enough that no one really needs to worry about spilling Thousand Island on Hamlet tights.

When the government has a budget deficit, it has a shortfall between the amount of money they spend and the amount of money they take in. They buy, say, three trillion dollars worth of stuff, but without enough cash to cover $500 billion or so. The county puts it on the credit card and hopes the bill arrives in the mail when the American people aren’t looking.

A trade deficit is only the difference between what we buy and what we sell

A trade deficit, however, is the difference between the amount of stuff we buy and the amount of stuff we sell. So if someone sells you their old comic book collection for fifty bucks, you have just racked up a $50 trade deficit with them.  But odds are that you won’t mind much, because you decided that you wanted those dog-eared drawings of Green Lantern more than you wanted the fifty bucks. And thus, through the magic of capitalism, both parties walked away happy, even though one side retains a “trade deficit” with the other.

So when Trump says we’re “losing” $500 billion in trade with China. We hand companies in China $500 billion, and they hand us… nothing, apparently, because that money is lost. Lost! We’re losing it! So who the hell cares?

Of course, that money is not lost. We handed them half a trillion bucks; they handed us all kinds of stuff – shoes and umbrellas and refrigerators and iPhones and Trump-brand neckties, all made in China. The $500 billion isn’t “lost” in the least. It’s been traded!

And it wouldn’t have been traded if someone didn’t prefer having iPhones to having the money they paid for them. The trades were voluntary because both parties are satisfied. No bill for $500 billion is going to arrive in the White House mailbox unless Melania decides to surprise Barron by buying Guam for him as a birthday present.

‘American carnage’, ‘America First’, or Common Sense?

In his inaugural speech, Trump got very passionate as he was describing “American carnage” caused by the horrors of other countries “making our products.” It’s time to rebuild the “rusted-out factories scattered like tombstones across the landscape of our nation.”  It’s going to be “America First.” Two rules: “Buy American and Hire American.” And that is how we’re going to make America great again.

Unfortunately, Trump has already unilaterally hiked tariffs on Canadian softwood lumber, he’s proposing withdrawal from NAFTA, and has sent the Trans-Pacific Partnership into oblivion. He’s going to make America again by returning it to the 1920s, when we didn’t live in a global economy.

Back then, the now-rusted-out factories were rust-free and churning out Model Ts built by 100 percent American labor. But now Ford can churn out sedans and SUVs that are exponentially more sophisticated than the Model T, and they can do it with a tiny fraction of the labor force. Why? Automation. Those assembly line jobs have been made obsolete by technology, and, Trump’s populist, protectionist rhetoric aside, they’re not coming back.

If labor is going overseas, it’s because the market has found a more efficient use of capital. If government jumps in and tries to stop it, it’s a bit like tearing up all the modern car-building machinery and forcing Toyota to make all its Priuses by hand, complete with hordes of seamstresses sewing up the leather seats.

Will that create jobs? Well, yes, but it will also destroy other jobs, destroy a great deal of wealth, and ultimately make Toyota so non-competitive that they’ll go out of business, thereby destroying the short-term Prius-leather-seat-sewing jobs that made Trump look like a hero when he created them.

And that’s what you get when you use dressing rooms to store salad dressing.


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