In his argument, Trump identifies the U.S. bilateral trade deficit with China as an economic loss. This is treating the U.S. as a whole as a business. Exports to various countries are treated as sources of revenue while imports from those countries are treated as costs of generating the revenue. Revenue less cost on trade with each country represent the profitability of each line of business.
Interestingly, I heard a Trump supporter quoted as stating that running an economy is just like running a business and since Trump is good at running a business, he would be good at running an economy.
Here we have proof that this is false. I do think that a business that conglomerates various business lines can and should evaluate the profitability of the different lines of business. Those that are not profitable should be discontinued or at least restricted. The profitable ones should be continued or even expanded. It is usually not wise from the point of view of the individual business to cross subsidize operations--that is, cover some of the costs from those lines of business that are losing money using profits from those lines of business that are profitable.
More importantly, such activity is not economically efficient. Those lines of business losing money are using resources--land, labor, and capital--that could instead be used to provide alternative goods and services that are more valuable. There is no particular reason to believe that the particular resources are better used by that same business to expand the production of goods and services where it can find profit. It is rather that the costs--prices of the resources--signal the value of the most important other goods and services that some business or other can use the resources to produce.
Adam Smith's concept of the "invisible hand," is best applied to the truth that the individual businessmen have no need to understand the relationship between profit and loss and the efficient allocation of resources throughout the economy. Their incentive to end or curtail losing causes exists even if they have no conception that this involves freeing up resources for the production of goods and services that other people find more valuable. They don't need to understand how this results in a market economic system that tends to produce the largest amount possible of the goods and services that people want most.
When trade occurs between national boundaries, each consumer and business in the trade can still apply the same approach. For a business, it would be wise to curtail sales of a product sold in England if the operation loses money. This would still free up resources in the U.S. for some firm or other to produce more valuable products.
However, if some businessman turned politician looks at statistics about imports and exports that sum up the activities of many businesses and households and treats net flows as aggregate profit and loss, the actual signals of what lines of business should be maintained or expanded and which should be ended or curtailed are lost.
Bilateral trade surpluses are not profits on export industries and bilateral trade deficits are not losses for export industries. Exported goods and services are not solely (or even mostly) produced with imported resources. And even if they were, aggregation country by country would only make sense if there were only one exported product and one imported resource.
County by Country trade deficits and surpluses are not relevant. This is easy to see with an example of bilateral trade. Suppose China imports oil from Saudi Arabia and pays for it by selling underwear to the U.S. The U.S. buys underwear from China and sells construction equipment to Saudi Arabia. Saudi Arabia buys construction equipment from the U.S. and sells oil to China. In such a scenario, the U.S has a large trade deficit with China, purchasing underwear from them and selling them nothing. No doubt U.S. underwear manufacturers would complain about unfair competition and manufacturers of construction equipment would lobby the government to promote their sales to China. But overall, U.S. trade would be balanced, with the bilateral trade deficit with China matched by the bilateral trade surplus with Saudi Arabia. If the U.S. underwear firms were able to get the government to limit imports from China, the indirect result would be reduced sales of construction equipment to Saudi Arabia. If the U.S. President acted like salesman in chief to get more sales of U.S. produced construction equipment in China, they would end up selling less construction equipment in Saudi Arabia.
Of course, this example is very simplistic. The real world with thousands of goods and services imported and exported and many countries is much more complicated. If the world really was just three countries and three products, perhaps "experts" could plan international trade as above. But in the real world, no one is able to find such simple patterns and so it is beyond the ability of government experts to efficiently manage global trade. The reason why the people of China had standards of living like the poorest people in Africa for decades and only now are approaching the standard of living of those in Mexico is that their communist government did try to manage their entire economy on the notion that national economic planning and organization must be more scientific and efficient than allowing thousands or millions of independent businesses to make their own judgments about profit and loss for their particular lines of business. The communist government gave up on it and now have more conventional economic mismanagement.
Bilateral trade deficits and surpluses mean approximately nothing A steel producer can make profits while running persistent deficits with the iron mine and surpluses with the car company. How much does your grocery store buy from you? Unless you work for a grocery store and shop there, you are running a big deficit with them. So what?
What is more relevant is the overall balance of trade for each country. The U.S. runs a trade deficit. But that doesn't mean that the U.S. is suffering anything like an economic loss from international trade. China runs a trade surplus. But that doesn't mean that China is making a profit from international trade. Most importantly, if the U.S. were to stop all international trade and seek self-sufficiency, the existence of a trade deficit does not mean that we would improve our well being. The result would rather be a reduction in U.S. output, income, and standards of living. It is true that if international trade were to cease, the result would be a reduction in Chinese output, income, and standards of living, but that isn't because they have a trade surplus.
Trade deficits and surpluses do not provide a signal of whether it is desirable for any particular country to expand or contract international trade as a whole. Further, they cannot be used to determine the benefits that the residents of each country receive from utilizing imported resources or consumer goods and services or selling exports. However, the overall trade balance does relate to national saving and investment. For a country with a trade deficit, domestic investment is greater than national saving. For a country with a trade surplus, national saving is greater than domestic investment.
If domestic investment--the purchase of new capital goods is ignored, then only those countries with trade surpluses can have national saving. Those countries with trade deficits must have national dissaving. If we imagine this condition existing from the beginning of time, then a trade deficit would imply that a country--the businesses, families, and government--are going into debt. In that simple world, people in countries with trade surpluses would be lending to people in countries with trade deficits.
However, this "from the beginning of time" assumption is not realistic. It would be possible for a people in a country as a whole to dissave by collecting on money that had been previously lent to foreigners and using the money received to fund consumption expenditures.
Further, domestic investment is not zero and so there is no necessary connection between national saving or dissaving and a trade surplus or deficit. All the countries in the world can expand their national savings by funding additional domestic investment. There is no way to determine whether a trade deficit or surplus are desirable or not without knowing more about their cause. For example, if the U.S. runs massive budget deficits to fund wasteful government spending and a trade deficit develops to limit the decrease in domestic investment due to lower national saving, it is a sign of trouble. On the other hand, if foreigners want a chance of high return capital investment in the U.S., it is a sign of success.
Suppose that rather that produce cars in the U.S., Americans buy their cars from Japan. Meanwhile, Americans build office buildings here in the U.S. and sell them to Japanese investors. The U.S. would be running a trade deficit with Japan. The U.S. would be importing cars and exporting nothing. Only if we began to put the Japanese-owned office buildings on barges and ship them to Japan would trade be balanced. If office buildings in the U.S. provide a better return than capital investments in Japan, this net capital outflow from Japan and into the U.S. is beneficial to the Japanese. And American workers and other resource owners can make more money producing buildings and selling them to the Japanese than building cars and selling them to the Americans. Total output and income in the U.S. would be higher.
In my view, if the U.S. reduces government spending and the budget deficit, and slows or better yet, stops, the growth of the national debt, the resulting increase in U.S. national saving would tend to reduce the U.S. trade deficit. And that would be all to the good. But to the degree foreigners want to put part of their national savings in the U.S. because they expect a good return or else consider it a safe haven, the U.S. will continue to have a trade deficit and it would be a sign of a good thing--ample investment in new machines, buildings and equipment in the U.S. The result is higher real output and real income in the U.S.
Donald Trump appears to believe that it is the clever management of the Chinese government that is allowing it to make national profit (trade surpluses) at the expense of its competitor, the U.S., whose leadership foolishly depends on market forces. In reality, it is only the partial freeing of the Chinese economy by the Communist rulers that has allowed for a tremendous improvement in their well being. Trumps vision of hard bargaining by U.S. politicians based upon a wrongheaded understanding of economics would not amount to turning the U.S. into the sort of disaster created by Mao Tse Tung. But it would be exactly the sort of disaster that resulted when strongmen took over the thriving Argentine economy of the early twentieth century and pushed it from the first world to the third world. Sure, the Argentinians do better than the Mexicans, but Peronist politics of tough bargaining against unfair trade from the U.S. and Europe resulted not in improved standards of living for Argentine workers compared to workers in the U.S. and Europe. The result was that the fell further and further behind.
Trump does not have a clue.
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