Economists Say Trump Seems To Misunderstand Significance Of Trade Deficit

The Trump administration has launched an investigation into the cause of trade deficits with U.S. trading partners. But most economists, say Trump appears to misunderstand what a trade deficit means.

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The big U.S. trade deficit with China is likely to be a topic of conversation at the summit this week at Mar-a-Lago. President Trump has promised to boost the U.S. economy and create jobs by closing trade gaps. But as NPR's John Ydstie reports, most economists, including some who support Trump, say the president appears to misunderstand what a trade deficit is.

JOHN YDSTIE, BYLINE: President Trump believes trade deficits are at the root of America's economic problems. Here he is criticizing trade deficits during the presidential campaign.

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PRESIDENT DONALD TRUMP: I believe in free trade, but we got to get something out of it. We can't have free trade where we lose $500 billion a year, where we lose a hundred billion with another country and 50 billion with another one.

YDSTIE: The problem with Trump's view, says economist Chad Bown, is that trade deficits aren't necessarily bad. And through trade, both countries benefit even if one has a deficit.

CHAD P. BOWN: Trade isn't a zero-sum endeavor. It's win-win. And I think that's a different framework than he's used to dealing with - you know, coming from the world of real estate where if I get something out of a deal, you know, it's something that you don't get.

YDSTIE: For instance, if Norway imports wine from France and exports oil to that country, both are benefiting by exporting something they're very good at producing and importing something they can't produce efficiently. And Bown says, for highly developed countries like the United States, a trade deficit doesn't necessarily imply economic weakness. In fact, the smallest trade deficit in recent years was in 2008, 2009 during the Great Recession.

Economist Larry Kudlow, who has advised Trump on economic issues, expressed frustration at the president's focus on trade deficits during a recent commentary on CNBC.

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LARRY KUDLOW: I don't understand it. Trade deficit is a terrible gauge of the economy. Or let me put it in reverse. If we're in a position of having a large trade deficit that means we're growing, and we're growing faster than the rest of the world.

YDSTIE: Growing fast enough to have the income needed to buy more imports. And when U.S. consumers and businesses buy imports, they're getting a Japanese car or German dishwasher in exchange for their dollars. So the question is what happens to those dollars? Well, very often they're reinvested in the United States, says Kudlow.

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KUDLOW: We're importing capital, and that capital can build factories, can put up car plants, whatever. It's fabulous.

YDSTIE: This has been a good deal for the U.S. economy, says Chad Bown, a fellow at the Peterson Institute for International Economics. That's because Americans don't save enough of their income to support all of the investment the U.S. economy needs, but our trading partners help us out by investing for us.

BOWN: We're essentially borrowing from the rest of the world at relatively low interest rates to be able to make the investments that we need without having to do the savings ourselves.

YDSTIE: And Bown says, the fact that countries like China hold large amounts of U.S. debt means they have an interest in keeping the U.S. economy healthy.

BOWN: Trade imbalances really have not been a significant impediment to the performance of, you know, the U.S. economy over the last 30, 40 years or so while we've been running these trade deficits.

YDSTIE: But it's not all good. While the overall economy and most individuals benefit, some people are hurt badly by trade. A recent MIT study documents the deep and long-lasting damage inflicted on some American workers, businesses and communities by the flood of imports from China in the early 2000s. Chad Bown acknowledges there are losers from trade.

BOWN: Some people, if they now face competition from Mexico or from China, they may lose their jobs. Companies may go out of business. And so there's a role for governments there to step in to do something.

YDSTIE: Bown says that doesn't mean erecting barriers to trade, but it does mean supporting workers and communities as they adjust and retool for new jobs. John Ydstie, NPR News, Washington.

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