Trump's Tariffs Show He's "Clueless About Trade"

What does Trump know about tariffs and trade deficits? Steve Hanke of the Johns Hopkins University provides the answer.

This is a guest post by professor Steve Hanke at the Johns Hopkins University. Hanke is also a Senior Fellow at the Cato Institute.

I strongly agree with Hanke and asked permission to republish this article.

Trump's Tariffs Are A Reminder He's Clueless About Trade

By Steve Hanke

President Trump and his trade team remain clueless about the economics of trade. Their recent imposition of tariffs on the imports of Chinese solar panels and South Korean washing machines is but the latest evidence of a wrongheaded and dangerous U.S. trade policy. Wrongheaded because it is based on incorrect economic analysis. Dangerous because it will inevitably result in a trade war in which there are no winners.

Let’s turn to the president’s trade team and its view of trade. The key players are: Wilbur Ross, U.S. Secretary of Commerce; Professor Peter Navarro, Director of the White House National Trade Council; and Washington trade lawyer Robert Lighthizer, U.S. Trade Representative.

To a man, the members of Trump’s trade team, and the president himself, all embrace the notion that the U.S. trade deficit, something the U.S. has registered every year since 1976, is a “bad” thing, something that should be dramatically reduced (or eliminated) if America is to be First. They also believe that the culprits for this “bad” state of affairs are unfair trade deals and unfair trade practices employed by foreign countries. Their elixir to eliminate the trade deficit is a strong dose of tariffs and other anti-trade policies imposed on foreign exports.

Now here is where the simple analytics of the trade deficit can be used to prove the cluelessness of the Trump trade team on “trade,” of all things, and the utter futility of its policy prescriptions having any impact on America’s aggregate trade deficit. In economics, identities play an important role. These identities are obtained by equating two different breakdowns of a single aggregate. Identities are interesting, and usually important, by definition. In national income accounting, the following identity can be derived. Indeed, it is the key to understanding the trade deficit.

(Imports - Exports ) ≡ (Investment - Savings) + (Government Spending - Taxes)

Given this identify, which must hold, the trade deficit is equal to the excess of private sector investment over savings, plus the excess of government spending over tax revenue. So the counterpart of the trade deficit is the sum of the private sector deficit and the government deficit (federal + state and local). The U.S. trade deficit, therefore, is just the mirror image of what is happening in the U.S. domestic economy. If expenditures in the U.S. exceed the incomes produced in the U.S., which they do, the excess expenditures will be met by an excess of imports over exports (read: a trade deficit).

The table below shows that U.S. data support the important trade identity. The cumulative trade deficit the U.S. has racked up since 1975 is about $11.154 trillion, and the total investment minus savings deficit is about $10.435 trillion.

U.S. trade deficits are not caused by so-called unfair trade practices. They are made in the good old U.S.A.

President Trump can bully countries he identifies as unfair traders, he can impose all the restrictions on trading partners that his heart desires, but it won’t change the trade balance. It will only alter the composition of those exporting to the U.S. And by affecting this composition, the president’s interventions will hurt the U.S. consumer.

For someone who is so obsessed by the size of the trade deficit, it is astounding that Trump’s advisers failed to inform him that his fiscal policy of expanding the government deficit will, as night follows day (remember the trade identity), balloon the U.S. trade deficit.

Authored by Steve H. Hanke of the Johns Hopkins University. Follow him on Twitter @Steve_Hanke.

Mish Comments

Once again, the roots of this problem date back to August 15, 1971.

That is when Nixon closed the gold window, ending foreign redemption of dollars for gold.

Mike "Mish" Shedlock

Comments (58)
No. 1-50
CaptainCappy
CaptainCappy

My first post Mish I'll make it a quick one (for me)-

CaptainCappy
CaptainCappy

I really think you are clearly a genius. and we have in common that we are both in Finance and Nature Photography at the same time-

CaptainCappy
CaptainCappy

but hey, with much respect I think you are unintentionally kind of falling for a fallacy here or maybe just a misread on the trump trade thing-

CaptainCappy
CaptainCappy

I am just saying-

CaptainCappy
CaptainCappy

I don't think he even has to believe in Tariffs working because he uses them, much less as an overall strategy. I believe his focus (misguided or not) is on making the deals, which is where he believes his strength lies

CaptainCappy
CaptainCappy

so in that sense

CaptainCappy
CaptainCappy

tariffs could be nothing more than waving a big stick in the air, positioning- Even to the extent that it was seen as collateral damage

Realist
Realist

Mish, I agree completely. Trump is clueless on trade. He might cause a lot of damage if he continues his aggressive trade policies. Though, I doubt he really cares as long as he is in the limelight, and appealing to his base.

CaptainCappy
CaptainCappy

I mean after all, if that was true he would be defenseless to your arguments because he would give himself away. Maybe it's wishful thinking, but it is literally the only flaw in logic I have seen in your work, this jumping to the conclusion that he believes the things he says or does literally, and theoretically, in a way that we can make assumptions about his intent. I am not just being a Trumpet here, I am just sayin....

CaptainCappy
CaptainCappy

You are a free trade guy, which I cant argue at all- Maybe its wishful thinking on my part, but correct me if I am wrong, either way, jumping to this conclusion is a logical fallacy, right?

CaptainCappy
CaptainCappy

Apologies for being critical with my first, I have been reading in awe for years and said nothing. real nice of me-

Realist
Realist

Hi Captain. Thanks for your first post. Everyone deserves to give their point of view. And everyone has the right to disagree with others. Just as long as you are polite about it.

N6532l
N6532l

Perhaps Trump and his team have looked at history instead of economics and noticed that from 1816 until 1967 the USA was the most trade protected nation on earth and the Boogie Man did not get us. From Abraham Lincoln until 1900 tariffs averaged above 40 percent and none of the glum and doom economist ascribe to tariff protection actually happened. Instead we prospered. Perhaps they also noticed that nearly 100 percent of economists collect a salary from an institution that benefits from free trade and just might be biased in favor of their masters.

Realist
Realist

Perhaps Trump wants to take the US back to 1816, when the life expectancy was 36 years, and the standard of living was lower than most third world countries today.

Barpi
Barpi

wow, anyone that considers themselves an "economic analyst" and then uses a phrase like "proves he's clueless" when speaking about the President of the United States is definitely not an opinion that you want to consider seriously in any form.

truthseeker
truthseeker

Mish u know how I agree with you about free trade but have never understood why u never, as with our billion dollar a day trade deficit with China, offer any ideas, solutions as to how to deal with this monsterous problem. Well u did say rather meekly that we need to cut our budget deficit which is only a little over a trillion a year. We both agree this problem would not exist had we not left the gold standard.in 1971.If someone suggests, if we somehow could move the dollar down by half say over a three year period, would that help our trade deficit and growth by increasing cheaper American export products and reduce our way more expensive imported goods and services? That could work, or at least help but it damn sure didn’t work the last time we did it so do you know why? A wild guess perhaps? Corporate stock options!! I can’t remember late 70’s early 80’s before China even started going, the Jap’s were killing us ~Mish r u talking to me?

truthseeker
truthseeker

Do you want me to move on here? Calm down Mish~I agree with what u suggest it’s totally right but impossible. A lower dollar down over 50% against the yen about 35 years ago didn’t help us because corporate America, when they had currency advantages to grow their businesses by going for market share, building new plants, factories instead pretty much said to hell with that and used their currency advantage to raise prices, get earnings up the easy way, maybe buy their stock, stock goes up, wait till the end of the year, check out month when stock is highest back date it exercise stock options~lots of fun!!!

formula57
formula57

A succinct and cogent article by Professor Hanke: thanks for posting. In this context, the recent Boeing - Bombardier case where the U.S.'s own International Trade Commission voted unanimously to reject Boeing's complaint and overturn the sanctions (tariffs) earlier imposed by the Trump administration perhaps provides another example of Trump being played: drowning in the swamp rather than draining it, alas.

truthseeker
truthseeker

Mish tho u probably wished I didn’t, you are my first read each day. You are right most of time~you were right when QE started as I remember, the only analyst who was right about inflation not showing up in prices but equities, bonds continued up as you and Lacy kept saying~that debt is deflationary and low interest rates were causing malinvestment, loss of income for middle class savers among other things. Thanks..

Greggg
Greggg

Just wondering if anybody has sorted out the cost of lumber from just one year ago, it's up over 50% after Trump put tariffs on Canadian lumber last year. How much might be due to the hurricanes and fires vs demand for new construction/remodeling. Many companies lumbering in Montana, Oregon, California, and Washington want to do selective cutting of heavily forested areas to thin out and promote healthy growth and cut down on destructive fires, but when they get permits to do the cutting, the Social Justice Warriors show up with a lawsuit and a preliminary injunction. These companies have pretty much given up on the practice. It makes one wonder who is really behind these lawsuits.

klausmkl
klausmkl

More Hyperbole and sensationalism about Trump for click bait.

Sechel
Sechel

farmer's are already complaining that trump's stance on nafta is going to cost them dearly.

Top-GUN
Top-GUN

Truthseeker says "...offer any ideas, solutions as to how to deal with this monsterous problem. ..."

nodhannum
nodhannum

And I am sure that the slave holders in the old south had the same view of abolition.

Top-GUN
Top-GUN

Hey truthy, maybe you just think it's a Monstetous Problem... I don't see a problem, ,, within our country dome States have "trade deficits" with other states,,, who cares it's just business,,, can't believe people want to punish foreign competitors and subsidize inefficient American Mfr such as whirlpool by making Me pay more for a washing machine.

KidHorn
KidHorn

We give them debt denominated in our currency and they give us goods. What's the problem? Why focus on China and Korea? We import a lot of oil. Less than we used to, but we still import more than we export, So why not put a tariff on oil imports? After all, as the oil price goes up, the more economical it is for us to produce our own oil. Of course, that would be political suicide, but really not much different than putting tariffs on solar panels.

El_Tedo
El_Tedo

Why is everyone with a different perspective or opinion these days have to be either stupid or racist?

Realist
Realist

Hey El_Tedo. People are entitled to their opinions. And I find most people on this site can still be polite while disagreeing. I think Mish saying that Trump is “clueless” on trade is simply saying that Trump doesn’t “understand” trade. Or perhaps he actually does understand the importance of trade, but needs to keep playing to his base with anti-trade outbursts. My fear is that Trump’s rhetoric is actually encouraging more trade disputes (lumber, bombardier, steel, washing machines, dairy, etc) which will ultimately hurt US consumers with higher prices and also result in more trade retaliation from other countries. A trade war is not something any country wins. Everyone loses.

Carl_R
Carl_R

While it's true that the equation the professor cites is true, the interesting question is which elements are "constants" and which are variables, and I don't think that the answer is obvious. The author takes the opinion that the (Savings-investment) term is constant, meaning that larger federal deficits mean larger a larger trade imbalance. Suppose the balance of trade is the constant? Then the equation simply tells you that the more government spends, the more individuals have to save. That makes logical sense: If the government takes your money and spends it, it makes it harder for you to spend it, too.
The authors are correct that the only term that the government can directly control is the Federal deficit. If the government were to actually balance the budget, what would happen is that the trade deficit would equal the term (Savings-investment). Thus, we would only have a trade deficit if people stopped saving, and this is the professor's point.

RonJ
RonJ

"Once again, the roots of this problem date back to August 15, 1971." The roots of the problem go back farther than that. Closing the gold window was a reaction to that which came before it. China does not have a gold window, yet they have a trade surplus. The U.S. became producer to the world after WW2. It was a period of time, not something that could be maintained as a permanent status. Empire is also a period of time, otherwise the Roman Empire would still be today.

El_Tedo
El_Tedo

Hi Realist: I think everyone agrees a trade war is the worst outcome. However, I think free-trade purists sometimes oversimplify the views of people who believe we should only have free trade with nations that reciprocate. Other nations, we need to negotiate reasonable terms. I think it's analogous of a personal relationship. You have to be willing to walk if you're being treated poorly, even if that would be more painful than staying, otherwise you won't be respected.

frozeninthenorth
frozeninthenorth

Good morning to all, the surprising thing about the comments to mish's column is that there appears to be a confusion about 'desire" and "mathematical identity". It is impossible to consider trade in the great abstract -- in fact, its the same (opposite) for Germany -- it is the engine of export in Europe, and therefore must hold a lot of debt from its clients. El Tedo in particular! BTW I would suggest that the latest tax cuts will create a massive deficit, far in excess of the 1.5 trillion that Trump's administration massaged -- the impact will be massive trade deficits (also higher interest rate..maybe)

AWC
AWC

Tariffs are themselves unfair trade practices. All imbalances, if left to their own devices, will eventually balance. Economies are self organizing structures. When they are tweaked by outside forces, such as governments, they lose their efficiencies.

toast
toast

I disagree that this can be oversimplified down to "trade imbalance". Trump may be using that as a talking point to politically simplify the objective. but I think situations described in this link are a more accurate story. It's not so much about trade imbalance as it is about fair trade.

toast
toast

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AWC
AWC

All a tariff on solar panels will accomplish is, it will intensify the efficiencies of foreign manufacturers and cushion the inefficiencies of domestic producers, until the latter go out of business. A tariff being nothing more than a reverse subsidy, as it were.

AWC
AWC

Now, all said, I'm waiting for the day the Chinese government decides to subsidize gold sales to foreigners. But, alas, the US Gumnut would likely put a tariff on it ;-)

Realist
Realist

Lots of good points today. In terms of “free trade”, I agree with Mish that “free” is ideal. However, I also realize that in the world today, the road to free trade begins with trade agreements. Perhaps over time these agreements will reach Mish’s goal of a free trade agreement written on a napkin. In the meantime we can do three things; move further away from free trade, maintain the status quo,or mover closer toward free trade. Trump seems to be moving us further away. He uses the argument that all previous trade deals were unfair to the US, and he wants deals that put America first. This appeals to many Americans, and helps Trump politically, but it is completely wrong. The only reason that any country signs a trade agreement is because it a net benefit to that country. Otherwise they wouldn’t sign it. So all trade agreements are signed because it benefits both sides. Trump is trying to convince people that this isn’t the case by using words like “fair” and “reciprocal”. He implies that only he is capable of getting good trade deals for America. This is hogwash, and more likely to end up restricting trade rather than improving it. If he pulls out of NAFTA, as he keeps threatening, many Americans will lose a lot.

SweetKenny
SweetKenny

Not to give too much credit to Trump but what if Trump wants to put the breaks on the debt economy but can’t do so directly since he’d never get the votes to stop spending. Instead he undermines the trade deficit and blusters about fair trade. Trump makes foreigners the cause even while he is truly the cause through tariffs.

Kinuachdrach
Kinuachdrach

Mr. Hanke reminds me of those global warm-mongering alarmists -- take a little bit of theory, and blow up its significance beyond all reason. And economy is a complex entity -- where in Hanke's little equation do we find the term for the impact of over-regulation, or the impact of innovation? We can all agree that TRUE free trade would be a good thing. But almost all international trade is managed in some form -- often in ways that are hard to control. For example, the social pressure in Japan against buying a foreign-made automobile. And imports do more than benefit consumers through sometimes lower prices, it impacts the broader economy through the resulting export of jobs which in turn leads to very expensive social problems.

Kinuachdrach
Kinuachdrach

I hesitate to disagree with our host -- Mish has great insights and pungent comments on many issues. But the trade deficit is not a simple consequence of going off the Gold Standard. Mish's graph shows the US dropping off the Gold Standard in 1971, and the trade deficit ballooning in the mid-1990s -- a quarter of a century later!!! Over that same time period, the Government Regulatory Complex exploded, starting with the Environmental Protection Agency. That made it much more expensive to manufacture in the US, and businesses moved factories overseas. It seems that over-regulation is a much more significant cause of the trade deficit than the departure from the Gold Standard.

Frog
Frog

It's not solely coming off the gold standard, but because Chinese and Petro dollar states do not have freely floating currencies.

jonadavis
jonadavis

Countries that run an overall trade surplus could let their currencies rise until their trade was balanced. The Asian countries don't do that. They invest the money from their trade surplus in the US, often by buying US treasuries, in order to keep their currencies low relative to the dollar and to maintain their trade surplus. This is not the US's doing. Granted, we could balance our budget and not have new treasuries to sell, but with a one-person one-vote democracy fiscal responsibility is not going to happen.

Ambrose_Bierce
Ambrose_Bierce

Lazy Americans get cheap products from China, where the hours are long and the benefits meager, and when those jobs come home, and when fat ass America has to go back to work for those wages they will throw Donald Trump under the bus.

Carl_R
Carl_R

Mish's point with regard to the gold standard is that with a gold standard in place, you can't run a trade deficit for a long term or your lose all your gold. And, in normal times, that was true, however, is it inherently true? In normal times you can't run a trade deficit in the absence of a gold standard, either, or your currency falls when the foreign countries repatriate the profits. Neither situation accounts for the question of what happens if the foreign country with the trade surplus is content to leave their profits in the US. Even with a gold standard, China could leave their profits in the US, buying bonds, stocks, companies, and real estate. If they don't try to take the profits home, they don't take all the gold, and the trade deficits can continue.