“Our trade deficit ballooned to $817 billion,” Donald Trump told steelworkers in Granite City, Illinois, this week. “Think of that. We lost $817 billion a year over the last number of years in trade. In other words, if we didn't trade, we'd save a hell of a lot of money.”
When I heard the clip from the president, the first response that came to mind was that of the high school principal played by James Downey in Billy Madison:
What you've just said is one of the most insanely idiotic things I have ever heard. At no point in your rambling, incoherent response were you even close to anything that could be considered a rational thought. Everyone in this room is now dumber for having listened to it. I award you no points, and may God have mercy on your soul.
Downey’s comment may be extreme, but President Trump’s soundbite is one of the most astonishingly ignorant things I have ever heard a sitting president utter.
Sure, sitting presidents have misspoken. Barack Obama had his “57 states” gaffe. The Bushes were no strangers to mush-mouthed soundbites either. One of my favorites was when Bush-41 tried to say, “Nitty Gritty Dirt Band” and it came out “nitty ditty nitty gritty great bird.” Even a polished actor and politician like Ronald Reagan was not immune to a slip of the tongue. The Gipper’s jokes are sometimes taken for gaffes, but when he said, “We are trying to get unemployment to go up, and I think we're going to succeed,” it probably was not intentional.
Those gaffes were good for a laugh, but no one really thought that they didn’t know the real number of states, the real name of the band or wanted unemployment to increase. In the case of President Trump, however, it seems likely that he really does believe what he says about international trade. After all, he's been saying the same things for years.
There is so much wrong with the president’s one remark, never mind the entire speech, that it is hard to address the entirety of his error within a short article. To begin, his figure on the size of the trade deficit is factually incorrect. The Bureau of Economic Analysis put the 2017 trade deficit at $568 billion. President Trump seems to have pulled the $817 billion figure from where the sun does not shine.
It is also astonishing that President Trump seems to consider money spent on trade to be “lost.” Is money lost when you spend it on groceries or when you buy a new car or house? International trade is no different. The idea that trade money is “lost” is nonsensical.
Trade is a voluntary exchange. No one has to enter into a trade deal that they don’t believe is to their benefit. If the price of milk is too high, don’t buy it. Go to a different store. It’s no different with international deals to buy Chinese steel, German cars, Mexican tequila or Saudi oil. If it’s a bad deal, go to a competitor.
The president’s statement that “if we didn't trade, we'd save a hell of a lot of money” is technically true, but also nonsensical. If we didn’t trade, we would have lots of dollars, but we can’t eat dollars or live in them or drive them to work. (Perhaps you could wear them if you stitched them together into clothes, but I digress.)
There would be pros and cons to hoarding cash and not engaging in trade. The downside to stockpiling a houseful of green paper is that you don’t have other things that you may want or need. It would be a case of “no phones, no lights, no motorcars, not a single luxury” as a famous ballad put it. On the plus side, you could use all that cold, hard cash to play Scrooge McDuck (hat tip to the Cato Institute’s Scott Lincicome) or reenact the sex scene from Indecent Proposal, but that would probably get old after a while - like when you got hungry - and I suspect that rolling around on piles of currency really isn't as comfortable as television would have us believe.
President Trump may actually believe that not trading with foreign countries would Make America Great Again. After all, if there were no international trade, there would be no trade deficit and the trade deficit has been Mr. Trump’s bogeyman for years. With no trade, zero equals zero and we have trade equity.
Mr. Trump doesn’t address the problem of comparative advantage. Not all products are made in the United States just as any country doesn’t make every conceivable product. Some countries have a comparative advantage on low-skilled labor that makes them more efficient at building simple products. On the other hand, the US has highly skilled workers that are among the best and most efficient in the world when it comes to high tech products such as aircraft, industrial machines and pharmaceuticals. We also have an abundance of oil and farmland, resources that other countries lack, that allow us to export food and energy products.
With no trade, you’d probably pay more for many commonly imported items, from avocados which come from Mexico to mobile phones assembled in China and South Korea, if you could get them at all. For instance, the US grows avocados domestically, but not enough to meet the demand of 600 million pounds annually. If US farmers shift production to grow more avocados, they would have to stop growing other crops.
But that’s okay since US workers would have less money to spend anyway. Workers in jobs related to imports and exports would face massive layoffs. Those in other industries would also face job and wage cuts as the world slipped into a recession.
The core problem with Mr. Trump’s logic is that a trade deficit is not always bad, and a trade surplus is not necessarily good. Few conservatives would want to emulate Venezuela, but the socialist South American basket case of a country has been running trade surpluses since 1997.
What do trade surpluses and deficits really mean? The legendary economist Milton Friedman, whose humor and eloquence made economics understandable to the masses, once explained that most people, President Trump included, think about trade in a way that is exactly backwards:
When people talk about a favorable balance of trade; what does that term taken to mean? It's taken to mean that we export more than we import; but from the point of view of our well-being that's an unfavorable balance. That means we're sending out more goods and getting fewer in. Each of you and your private household would know better than that. You don't regard it as a favorable balance when you have to send out more goods to get less coming in. It's favorable when you can get more by sending out less.
In other words, the US trade deficit means that Americans are getting more “stuff” from other countries than they are sending abroad. In any other situation, getting more than you are giving in a deal would mean that you are “winning,” to use President Trump’s (and Charlie Sheen’s) phrase. But somehow, we have convinced ourselves that, when it comes to international trade, sending lots of stuff to other countries and getting very little back is a good thing.
I don’t blame the Granite City steelworkers for leaping to support Donald Trump’s protectionism of their industry. I was laid off twice and know how gut-wrenching it can be for the head of a household to suddenly lose his income, but, as Friedman explained, the big government protectionism of steel makes new victims in other industries. Most people just don’t see the jobs being lost because they are dispersed throughout the country rather than concentrated in steel mills.
The steel mill workers can’t be blamed for their self-interest in protecting their jobs, but President Trump can be blamed for a view on trade that is not grounded in reality. Any president, regardless of party, should be expected to have a basic understanding of economics. Republicans rightly criticize Bernie Sanders and Alexandria Ocasio-Cortez when they say outlandish and ignorant things. Republican leaders, especially the president’s advisors, have a duty to confront and educate the president about economics when he starts sounding more like Senator Sanders than President Reagan.
Originally published on The Resurgent