One of the main areas of emphasis for the Trump presidential campaign has been trade, more specifically, our trade deficit. A trade deficit is the total dollar amount of the products that we export to other countries, minus the total dollar amount of products we import from other countries. Today, our trade deficit is a little under 800 billion dollars. This is a big problem according to Donald Trump, but he's wrong.
Trump uses the trade deficit as a scare tactic. But basic economics should calm people down.
Donald Trump paid my college a visit for a campaign event. One of his main talking points was how we're losing when it came to trade because of our trade deficits. He told the crowd that we're losing money, and losing jobs, because of the deficits. This ultimately comes down to Trump's failure to analyze what's actually going on.
First off, we're not "losing money". The trade deficit is simply an accounting identity. More goods come into the country, than leave the country. That's it. The trade "deficit" part, is the net amount of the value of our imports. So if you one day win the lottery, become very rich, and decide to buy a Maserati, you are contributing to this trade deficit Trump speaks of, because you used your money to buy a foreign good and use in the United States.
Trump knows the word "deficit" scares Americans. Conservative pundits and politicians use the word all the time to scare people into believing that the country is going bankrupt, even though it's not. But if you want a better perspective on what the trade deficit is and what it implies, you can reverse the words and basically call it an "Asset Surplus". That's what our trade deficit is, an asset surplus. We are receiving more goods into the country, than we're losing. That's a good deal on our part. Because the real wealth of this country isn't necessarily the amount of money we have in our accounts, but it's the things that the money can get us. These goods that we receive directly improve our standard of living.
For example, Japan sends us about 2 million cars a year, while we send them only about 10 thousand. Yes we're in a trade deficit, but we're also receiving more cars than Japan is, while they receive more cash. So Americans get to use and enjoy the cars we've bought while Japan sits on more cash, but with less goods in their country to enjoy. There's no question that America is getting the better end of the deal.
But aren't trade deficits job killers?
Not necessarily. It's true that a factory can close down in the U.S and move overseas, therefore laying off people. Although those specific jobs are lost, new jobs can also be added into the economy. Look at Ohio for example, Trump cites the fact that 100,000 jobs have been lost in Ohio to other TPP countries. Yes those jobs are gone, but Ohio has actually increased the net amount of jobs in the state, which is why their unemployment rate is only about 4.9 percent despite losing those 100,000 jobs.
Trade deficits don't get too out of hand either. Let's bring the discussion back to Japan. They sent 2 million cars to us, and now they have more cash. But when you have more cash, chasing less stuff, you get inflation. In order to avoid that, those countries end up buying products from us and creating new jobs in new sectors, or they'll choose to invest in our stocks and bonds. This ensures that the job losses caused by a trade deficit, don't get out of hand, and eventually get replaced.
Fiscal policy also has a lot to do with the amount of jobs we have in this country. If the country isn't creating more net new jobs after job losses, it's because consumer demand isn't high enough to create those new jobs. Which is why it's important for the government to lower taxes and increase spending in order to increase overall demand to the levels needed to create new jobs for the country.
Donald Trump doesn't understand our current trade situation, and he uses big numbers and negative sounding words to scare us into thinking that we need to change something. In reality, while our trade is at a deficit, our assets are at a surplus and Americans are enjoying a higher standard of living because of it.
