The Trump Trade Doctrine and Bilateral Trade Balances

The Trump Trade Doctrine and Bilateral Trade Balances

photo: Gage Skidmore

Trump Trade Doctrine

Donald Trump campaigned against bad trade deals, and he promised to negotiate “better deals”. The exact meaning of a better trade deal for America was revealed in a document, “Scoring the Trump Economic Plan”, written by advisors Peter Navarro and Wilbur Ross. Navarro will head the new White House National Trade Council, and Ross has been nominated to become the Secretary of Commerce (Reuters). Trump and his advisors criticized NAFTA, as well as other trade agreements, because it resulted in bilateral trade deficits for the US against both Mexico and Canada. According to Navarro and Ross, “Donald Trump has pledged to renegotiate every one of these bad trade deals according to the principles of the Trump Trade Doctrine” that would, among other things, “decrease the trade deficit”.

Bilateral Trade Balances

In 2015, Mexico had a trade surplus of $49 billion with the US. and Canada had a bilateral trade surplus of $15 billlion with the US. China does not have a trade agreement with the US. but it has been accused by Trump of currency manipulation, dumping and other improper tactics. China had a bilateral surplus of $367 billion with the US in 2015. Presumably the Trump Doctrine would seek to renegotiate or alter these trade relationships and others to achieve bilateral surpluses (or at least smaller bilateral deficits). Hufbauer and Jung have listed major US trading partners and their bilateral deficits or surpluses with the US. for 2015. In addition to the bilateral deficits with Mexico, Canada, and China, there were bilateral deficits of $77 billion with Germany, $55 billion with Japan, $30 billion with Italy and $30 billion with India, even though the US has no trade deals, bad or good, with these countries.

Trade Balances Are Not Profits

One might ask why the Trump Trade Doctrine considers a bilateral trade surplus to be a virtue? Perhaps the proponents think a bilateral trade balance for a nation is like a business profit and loss statement. If a business earns revenue that is greater than its cost, the difference is profit. However, a nation is not a business. More fundamentally, having a trade surplus with a business partner does not necessarily imply that the trade relationship adds to profits. A business may sell $1 million worth of merchandise to a customer without buying anything from that customer in return. The result is a $1 million trade surplus with that customer, but if the cost to the business is $2 million dollars, the trade transaction results in a loss of $1 million, in spite of the bilateral surplus. Information about a trade surplus does not provide information about profit. Some information about cost is essential.

Bilateral Trade Balances For An Airline

Consider a closer look at bilateral trade relationships for a specific business. Every airline buys fuel from a supplier, but the airline rarely sells anything to the fuel supplier. Airlines have regular bilateral trade deficits with fuel suppliers, whether the airlines are profitable or not. Airlines also have regular bilateral deficits with suppliers of peanuts and pretzels that they give to passengers. They also have regular deficits with pilots, flight attendants, and mechanics, but neither airline executives nor shareholders consider these deficits to be harmful. What is relevant for airline shareholders is whether the expenditures that contribute to the bilateral deficits add to or subtract from profit. This information cannot be obtained from bilateral trade deficits alone.

Bilateral Balances For A Consumer

Consumers face a similar issue regarding bilateral trade deficits. Most consumers have bilateral trade deficits with gasoline suppliers and food suppliers. They buy from these suppliers, but they sell nothing to them. Most consumers also have bilateral deficits with dentists, doctors, and internet providers. However, most consumers do not consider these deficits to be problems. Most consumers only have trade surpluses (sell services) to their employers. It would be possible for consumers to try to reduce deficits with gasoline suppliers and dentists by selling them something, but it would be extremely awkward and time-consuming. The opportunity to run trade deficits with many suppliers is an enormous convenience to most people.

Bilateral Balances Sum To Zero

When the bilateral balances for two partners are added up, they must sum to zero. If the US has a deficit of $15 billion with Canada, Canada must have surplus of $15 billion against the US. It would be logically impossible for both countries to increase their bilateral surpluses. If the US deficit is reduced by $1, Canada’s surplus must be reduced by $1. If all counties adopted bilateral surpluses as goals, they could not all succeed. There is no economic rationale for one country to adopt the Trump Doctrine unilaterally, and if two countries wrote into an agreement that they must both have bilateral surpluses, it would be impossible to satisfy. Trade negotiators around the world are aware of this impossibility, even if Ross and Navarro are not. No agreement includes the conditions that both countries must have bilateral surpluses. If an American wanted to buy $100 worth of Canadian maple syrup, would the Trump administration block the purchase unless the American could also find $101 worth of goods to sell to the maple syrup seller?

Trade Is Mutually Beneficial

Bilateral trade balances add up to zero, but that does not imply that trade is not beneficial. Mutual gain is an essential feature of voluntary trade. For example, both airlines and their fuel suppliers increase their profits by trading in fuel, even though the airline has a bilateral deficit and the fuel supplier has a trade surplus. Total profits increase for both businesses as a result of the transaction. For a household example, if parents hire a neighbor to babysit for their child, both parties gain even though the parents have a bilateral deficit with the babysitter. The transaction is win-win or positive sum.

Bilateral Balance Versus Global Balance

The bilateral trade deficit of a country with one trade partner should not be confused with a country’s total trade balance with the world. The United States has had a trade deficit with the rest of the world every year since 1976, even though in 2015 it had bilateral surpluses with some countries and deficits with other countries. The total or global trade balance is the sum of bilateral balances with all partners, and in 2015 the US global trade balance was a deficit of $500 billion. These persistent trade deficits began long before NAFTA and the entry of China into the WTO, and they cannot plausibly be attributed to “bad trade deals”.

Trade deficits are a component of current account deficits that measure the excess of domestic investment over domestic saving. The Federal government’s budget deficit contributes to the low level of domestic saving, and it will be a controversial topic for the new President and Congress. However, one should be careful about policies to reduce balance of payments deficits. A sure way to reduce the balance of payments deficit is to send the economy into a recession. The payments deficit was cut in half from $761 billion in 2006 to $383 billion in 2009 as the economy descended into the Great Recession. This was a costly way to reduce a balance of payments deficit.

Conclusion

The claim that trade surpluses are beneficial to a country was made by the mercantilists centuries ago, and it continues to appeal to some people today. It has resurfaced today in the form of the Trump Trade Doctrine, in spite of its lack of economic merit. The United States faces many legitimate economic problems today, and it would be a major mistake to worry about a bogus problem such as trade deficits with specific partner countries. Imposing tariffs against Mexico, Canada, or China in an attempt to reduce bilateral trade deficits would be a self-inflicted wound.

 

References

Hufbauer, Gary Clyde and Euijin Jung. 2016. “US Bilateral Trade Balances: A New Guide to Trade Policy?” Peterson Institute for International Economics, November 15. https://piie.com/blogs/trade-investment-policy-watch/us-bilateral-trade-balances-new-guide-trade-policy

Navarro, Peter, and Wilbur Ross. 2016. “Scoring the Trump Economic Plan: Trade, Regulation, and Energy Policy Impacts”. September 29. Link

Reuters. “Chinese Media Alarmed at Trump Trade Adviser: Link