Trump, Trade, and Math

Many anti-trade politicians are motivated by “public choice,” which means they simply think of the issue as a way to get votes and campaign contributions.

Donald Trump, however, seems to genuinely believe in protectionism.

I think this is because he mistakenly thinks a a trade deficit means a nation is somehow getting cheated or ripped off.

This is absurd as a matter of economics. But I now think Trump also doesn’t understand math.

Many of his recently announced trade deals with other nations have two features.

1. A tariff or tax on Americans consumers and businesses that buy from that country.
2. A promise from that country that there will be new investments in the U.S. economy.

However, as shown by this Venn Diagram from Mark Perry, these two features are in conflict.

Simply stated, you cannot simultaneously get more foreign investment and have a lower trade deficit.

It’s a matter of math or accounting.

Here some of what I shared earlier this year.

When foreigners earn dollars by selling to Americans, they can either use those dollars to buy American products or they can invest those dollars in the American economy. If they invest in the American economy (which Trump recognizes is a good thing), that necessarily means a higher trade deficit (which Trump thinks is a bad thing).

And here’s a chart showing why Trump’s objectives are mutually impossible.

In other words, trade deficits and investment surpluses are mirror images!

For those who are wondering whether Trump is really pushing for inconsistent goals, here are some excerpts from a New York Times report by Alan Rappeport.

As you can see, he’s making a big deal out of attracting more investment.

President Trump’s tariff threats have turned into a play for cold, hard cash as he tries to leverage U.S. economic power to cajole other nations to make multibillion-dollar investments in order to maintain access to America’s market. …The tactic was on display last week as Mr. Trump and his team rolled out a blitz of new trade agreements… Mr. Trump agreed to impose a tariff of 15 percent on imports from South Korea. The lower rate came after South Korea agreed to make $350 billion in investments in the United States… Japan said it would establish a $550 billion fund for investments in the United States. The European Union indicated that its companies were poised to invest at least $600 billion.

And don’t forget about the $1 trillion of investment that Saudi Arabia allegedly has promised.

The bottom line is that these new investments – assuming they are fulfilled – will mean a bigger trade deficit. Yet Trump wants to get rid of the trade deficit.

Makes me wonder whether the rational people in the Trump Administration have ever tried to explain to him that his approach is profoundly illogical.

Given his illiteracy on the issue, it probably wouldn’t make a difference.