Donald Trump has ranted over and over again about the trade deficit. Pick a MAGA rally, and you will see him complain about the trade deficit with China or the European Union.
Here’s but one of many examples:
We had an $817 billion dollar trade deficit among all countries over the last number of years. Think of it, per year, per year, $817 billion. That’s a year. Do you think they’re good trade deals? Oh, wonderful deal, whoever negotiated those deals.
Here’s the thing, though, Donald Trump has no idea what he is talking about when it comes to trade. To quote James Mattis, he has a fifth grader’s understanding of things.
The United States has a trade deficit because the United States is the wealthiest country in the world. We use that wealth to buy stuff. The trade deficit exists because we buy more than other countries buy. Bringing down the trade deficit would be an indication that we are getting less wealthy with relation to the rest of the world. To further betray his complete lack of knowledge about a subject he has made a defining issue of his Presidency is this completely ridiculous statement from that same rally:
You know, if I get the trade deficits down they never tell you this, if I get the trade deficits down, bring them down. If I bring the trade deficits down, we could pick up three and four points in GDP. Nobody says that, nobody says that.
Do you know why nobody says that? Because it is not remotely true. Here is what people who actually know about economics say:
As Milton Friedman explained back in the 1970s (italics added):
In the international trade area, the language is almost always about how we must export, and what’s really good is an industry that produces exports, and if we buy from abroad and import, that’s bad. But surely that’s upside-down. What we send abroad, we can’t eat, we can’t wear, we can’t use for our houses. The goods and services we send abroad, are goods and services not available to us. On the other hand, the goods and services we import, they provide us with TV sets we can watch, with automobiles we can drive, with all sorts of nice things for us to use.
The gain from foreign trade is what we import. What we export is a cost of getting those imports. And the proper objective for a nation as Adam Smith put it, is to arrange things so that we get as large a volume of imports as possible, for as small a volume of exports as possible.
This carries over to the terminology we use. When people talk about a favorable balance of trade, what is that term taken to mean? It’s taken to mean that we export more than we import. But from the point of our well-being, that’s an unfavorable balance. That means we’re sending out more goods and getting fewer in. Each of you in 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 fewer coming in. It’s favorable when you can get more by sending out less.
Trade deficits are not a bad thing. They simply mean we are getting more stuff by sending out less stuff. They are a sign of a wealthy country.
The other ridiculous aspect of all of this is that Donald Trump’s proposed solution to the non-existent problem of trade deficits is a trade war that will do nothing about the trade deficit. All it will do is reduce the amount of overall trade. We may import less, but we will also export less. In fact, so far, Trump’s trade war has only increased the trade deficit he keeps griping about.
New data out Wednesday showed the U.S. trade deficit in July widening at its fastest rate since 2015 as monthly deficits with China and the European Union both hit new records. In the year so far, the U.S.’s overall goods and services deficit is up by $22 billion, or 7 percent, versus the same period last year.
So, Trump’s trade war is actually widening the trade deficit he wants to decrease (for no good reason). And, back to his comment about increasing GDP: it is set to do the exact opposite. Because the one thing that trade wars do is reduce the amount of overall trade, which is not good for any economy involved in the trade war.
Andrew Hunter of Capital Economics said the trade data released on Wednesday indicated that after boosting GDP figures in the second quarter, net exports would subtract from it in the second half. In the third quarter, he predicted, net trade would subtract more than a percentage point from GDP growth while the recent surge in the dollar suggested that trade could be a “modest drag” in the fourth quarter too, even before the impact of tariffs starts to take hold.
Not only is the trade war going to reduce GDP, it is also causing inflation.
Steel prices are up more than 40 percent since Trump said on March 1 that he planned to impose a 25 percent tariff on steel imports and a 10 percent levy on aluminum. That is a significant increase that has yet to be passed through to consumers. But it will, and when that happens, potential risks to both the stock market and the economy increase dramatically.
As steel prices rise, it makes major appliances, machinery, trucks and cars, and construction more expensive. Guess what that does to the price of eggs, bacon, milk, orange juice and coffee? Aluminum is in everything from transportation to packaging to cooking utensils. When steel and aluminum prices rise, so too do the prices of refrigerators, dishwashers, stoves — and the cost of your lunch.
And that inflation is eroding any minimal gains that are being made in wages.
Prices rose at their highest clip since 2012 over the past year, the Labor Department reported Thursday.
The 2.9 percent inflation for the 12-month period ending in June is a sign of a growing economy, but it’s also a painful development for workers, whose tepid wage gains have failed to keep pace with the rising prices.
The cost of food, shelter and gas have all risen significantly in the past year. Gas skyrocketed more than 24 percent, rent for a primary residence jumped 3.6 percent and meals at restaurants and cafeterias rose 2.8 percent.
Prices have risen roughly at the same rate as wages, erasing any gains workers may have hoped to realize via bigger paychecks.
Not to mention the damage the trade war has already done to farmers, necessitating an expensive taxpayer bailout.
The Trump Administration has announced a multi-billion dollar aid package for US farmers.
It is being seen as an admission that Americans are being hurt by the president’s protectionist policies.
What’s even more exasperating about all of this is that GOP leadership knew how stupid Trump’s trade war idea was to begin with.
Here’s Kevin McCarthy, Republican House Majority Leader, speaking in December of 2016 about the subject:
“I don’t want to get into some type of trade war,” McCarthy said.
“I think there are other ways to achieve what the president-elect is talking about,” McCarthy said, “but the only way you can do any of this is you’ve got to do tax reform. And that’s why I think that will be a cornerstone of what we do.”
“Tax cuts and deregulation will make the American economy great again, but tariffs and trade wars will make it tank again,” he continued.
Here’s Paul Ryan, in March of 2018:
“We are extremely worried about the consequences of a trade war and are urging the White House to not advance with this plan.”
Here’s Mitch McConnell, on June 3, 2018:
“I don’t think anything good will come out of a trade war,” McConnell said during an appearance Friday before Greater Louisville Inc., the metro chamber of commerce. “And I hope we pull back from the brink here. Because these tariffs will not be good for the economy.”
So, these guys know the truth about Trump’s trade war. Why aren’t they doing anything about it? The constitution gave Congress the power over tariffs, not the President.
Now, on tariffs the Constitution is crystal clear, stating, “The Congress shall have the Power to lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States.”
Congress is a co-equal branch of government. They should not be allowing a moron President to be usurping one of their duties in a manner that is detrimental to the country.
Yet, here is Mitch McConnell, on June 6, 2018, 3 days after he said tariffs will not be good for the economy, shooting down an attempt to reign in our moron President:
Senate Majority Leader Mitch McConnell (R-Ky.) signaled on Wednesday that he will not support legislation reining in President Trump‘s tariff authority and that the president will not sign such a bill.
“Yeah, I don’t think we need to be trying to rein in the president through legislation. No. 1, it would be an exercise in futility because he wouldn’t sign it,” McConnell told SiriusXM when asked if he opposed the bill.McConnell was asked about legislation, spearheaded by GOP Sen. Bob Corker (Tenn.), that would require Trump to get congressional approval for any tariffs invoked under the national security sections of the trade law, known as Section 232.