Do Trade Deficits Matter? – The Debate Heats Up

On March 6, Professor Peter Navarro, director of President Trump's White House National Trade Council, gave an important speech, entitled "Do Trade Deficits Matter?," to the National Association of Business Economists. Navarro is, himself, a business economist with a Ph.D. from Harvard, more than 50 professional publications, and about 30 years of experience as a college professor. Simultaneously, the editorial writers of the Wall Street Journal published a commentary adapted from Navarro's speech. Then, four days later, they debated his points on their editorial page. The same debate has also been raging within the Trump administration with economic nationalists, including Navarro, on one side and economic globalists on the other.

So who is winning? The final determination will be up to President Trump. But if the quality of the arguments determines the outcome, Navarro and the economic nationalists should prevail. Navarro made five valid arguments in his speech: Trade deficits subtract from GDP growth. Requiring balanced trade would reduce barriers to U.S. products. Balancing trade would increase fixed-investment and long-term growth. Trade deficits give us debt, which will have to be repaid with interest. Trade deficits endanger our national security. The editorial writers of the Wall Street Journal tried to counter these arguments, but they were unsuccessful. Were I (Raymond) still a professor of economics, I would give the WSJ an "F" in the economics of international trade. In the second paragraph, one reads that "a trade deficit isn't a debt that must be repaid. It is often a sign of economic prosperity." A trade deficit results in the accumulation abroad of U.S. currency, every dollar of which recites that "This note is legal tender tor all debt, public and private." The U.S. does not have to pay it back, but it can be used to buy U.S. government bonds; to purchase Rockefeller Center, as the Japanese did; to buy real estate, as many Germans have done; to buy U.S. companies; or to keep our IOUs as reserves for future use. The consequence of the trade deficit is to create jobs in the trade surplus countries and debt in the United States. In the third paragraph, the WSJ equates balance of payments with balance of trade, capital flows vs. trade in goods. The former is exchanging a $20 bill for two $10s. When we experience a trade deficit, our trading partners give us goods in exchange for our $20 bill. It takes labor and capital in the exporting country to produce the goods we import, while all it takes is paper and ink to produce our evidence of debt. Why would anyone want to exchange goods for a printed piece of paper? Is he stupid? No – he is buying our promise to let him gain ownership of productive assets in our country in exchange for the paper we used to pay for his goods. In the seventh paragraph, the WSJ writes that if trade surpluses were a sign of success, the 1930s might have been different, quoting Prof. Don Boudreax of George Mason U: "For only 18 of the 120 months of that dreary decade did the United States run a trade deficit. For each of the remaining 102 months of the decade of the 1930s the U.S. ran a trade surplus." But, as shown in the graph below, the period from 1930 to 1939 saw a lower trade surplus as a percentage of GDP than the preceding and subsequent decades. The WSJ also notes that "the U.S. ran a trade deficit in nearly every year of its rapidly growing first century." But this ignores the more rapid growth of the United States' second century. From 1800 to 1873, the U.S. often ran trade deficits, and real per capita income rose by one percent per year. But from 1873 to 1973, the United States often ran trade surpluses, and real per capita growth averaged two percent per year. Since 1974, with the return of trade deficits, real per capita growth has sunk to 1.67 percent. And from 1999 through 2016, the period of massive trade deficits, real per-capita growth sank to 1.1 percent. By failing to put their numbers in context, the WSJ editors risk misleading both themselves and their readers. The WSJ follows with the statement that money earned from export surpluses returns to the U.S. to "finance an investment shortfall in the U.S., especially government borrowing" – and "to finance mortgages and consumer loans, which help the U.S. standard of living." We guess the WSJ believes that, like the trade deficits, they do not need to be paid back. The large negative U.S. net international investment position means that Americans collectively owe global investors nearly 8 trillion dollars more than we own abroad, and over time, this tends to serve as a drag on our living standards. As for foreigners buying U.S. property, the WSJ writes, "The U.S. capital stock isn't a fixed amount and adding to what is here doesn't diminish U.S. ownership. It does, however, allow current owners to cash out of their property and put that money to other uses." Including spending it on foreign travel, imports of consumption goods, and investing abroad? The possibilities are endless. Pres. Trump was elected because so many of our leaders had been ignoring the chronic trade deficits and in fact were stimulating them. The nexus of policies and agreements that turned the U.S. into a debtor and exploded the trade deficit had the following effects upon the United States: We lost millions of good-paying manufacturing jobs, even as global manufacturing employment, especially in China, has surged . As a result, U.S. wage levels stagnated or sank. The U.S. went from being the world's leading creditor to the world's leading debtor. The U.S. adopted currency, tariff, and tax policies more favourable for imports than many of its trading partners and lacked the negotiating leverage to force a truly level playing field. The trade agreements were a stimulus to the flight of factories from the U.S. to our trading partners, secure in the knowledge that there would be no tariffs when they exported the products back to the United States. The WSJ continues: "Perhaps the best way to think about the U.S. trade deficits is not to think about it." It's true; they're not. If the economic globalists at the WSJ win, America will be the big loser. If President Trump enacts the suggestions of Peter Navarro and the other economic nationalists, America will benefit immensely. Raymond Richman is Professor Emeritus in Public and International Affairs at the University of Pittsburgh. His dissertation advisor was Milton Friedman at the University of Chicago. The Richmans co-authored the 2014 book Balanced Trade, published by Lexington Books, and the 2008 book Trading Away Our Future, published by Ideal Taxes Association.