The Truth About Trade

One of the Trump Administration’s primary rationales for imposing tariffs is the U.S. trade deficit. The trouble is that in and of themselves, trade deficits (or surpluses) are meaningless measures of a nation’s economic health.

The U.S. has had trade deficits for most of its existence. In the 1800s, as it became an economic colossus, the country routinely imported more than it exported. We had trade surpluses during the catastrophic Great Depression, when unemployment reached 25%. After President Ronald Reagan’s economic reforms in the early 1980s, the U.S. trade deficit grew as the economy expanded throughout the rest of the century. The more the economy expanded, the bigger the deficit grew. We had federal budget surpluses between 1998 and 2001, and the trade deficit widened.

Trade deficit worriers overlook the fundamental truth expounded by Adam Smith: Each participant in a transaction gets something. It’s not a zero-sum game.

All of us routinely run trade deficits. Forbes magazine has had deficits with its paper suppliers for over a century. Consumers run up deficits when they shop.

What stimulates prosperity are low tax rates, sound money, responsible government spending and minimal regulation. Certain misconceptions get in the way of understanding trade. Too often, our trade deficit number leaves out such services as finance, entertainment and certain high-tech services. Service exports come to more than $1 trillion a year. Our services export surplus is almost $300 billion.

Trade numbers include the buying and selling between American companies and their overseas affiliates, which is obviously a healthy activity. Concerning imports, half are parts used by producers. U.S. imports as a proportion of our economy are the lowest among advanced countries.

Patterns of trade can distort reality. Singapore’s imports look huge because that city-state is often the first stop on the way to their final destination in other parts of Asia. The same is true of the Netherlands regarding imports to other parts of Europe.

Trade exports ignore sales of stocks and bonds to foreign buyers. Trade statistics also overlook the trillions of dollars foreigners have invested in the U.S. economy. Foreign capital has played a crucial role in our growth—and will do so in the future if we get our economic act together.

After World War II, we looked back at the disastrous, protectionist-ridden 1930s and learned that reducing trade barriers was necessary to generate greater growth. By systematically reducing trade barriers, the U.S. and the world prospered as never before.

Trade is taking a bum rap for certain policy woes. Trade wasn’t responsible for damaging manufacturing with obscenely excessive regulations and high taxes, or burdening the country with exorbitant government spending, an unstable dollar or rules that bog down a proposed project, such as building a bridge and completing it in a timely manner. Or letting China get away with stealing our intellectual property and treating American companies there unfairly, or aiding in the flow of fentanyl into the U.S. Trade doesn’t prevent us from blocking investments that harm our national security or, similarly, blocking security-sensitive exports. Nor does it prevent us from pursuing trade agreements that reduce barriers, as we’ve been doing for decades.

We must see trade numbers for what they truly are.