Sorry, but Trump is Right: the Trade Deficit Matters

Never have I seen a political issue so susceptible to tricky conceptual sleight-of-hand and weasel arguments as America's trade mess. Specifically, our trade deficit.

This deficit, which has fluctuated around the $500 billion per year mark for a decade, is real money, period. It is actual wealth that somebody pays to somebody else, and that somebody then owns and somebody doesn't. That's how money works. It isn't Monopoly money, "paper" wealth, a accounting fiction, or any other category of nullity.

But free traders persist in explaining how it somehow, mysteriously, isn't real, doesn't count, doesn't affect anything important, etc.

Case in point: Peter Navarro, the newly appointed head of Trump's National Trade Council, was just bemoaning it. But then he got attacked by people like Dan Ikenson of the "conservative" Heritage Foundation and Noah Smith of Bloomberg News.

Navarro is right and his opponents are wrong. So it's worth reviewing, one more time, the inescapable basic logic underlying trade deficits, which makes clear why they can't not matter.

Here's how trade works:

Step 1) Nations engage in trade. Americans sell people in other nations goods and buy goods in return. "Goods" in this context means not just physical objects but also services.

Step 2) One cannot get goods for free. So when Americans get goods from foreigners, we have to give them something in return. These things are represented by tickets called "dollars," but it's ultimately the things we trade.

Step 3) There are only three things we can give in return:

a) Goods we produce today.
b) Goods we produced yesterday.
c) Goods we will produce tomorrow.

This list is exhaustive. If a fourth alternative exists, then we must be trading with Santa Claus, because we are getting goods for nothing.

Here's what a) - c) above mean concretely:

a) is when we sell foreigners jet airplanes.
b) is when we sell foreigners office buildings in the U.S.
c) is when we go into debt to foreigners.

b) and c) happen when America runs a trade deficit. Because we are not covering the value of our imports with a) the value of our exports, we must make up the difference by either b) selling assets or c) assuming debt.

If either is happening, America is either gradually being sold off to foreigners or gradually sinking into debt to them. Xenophobia is not necessary for this to be a bad thing, only bookkeeping: Americans are poorer simply because we own less and owe more.

As I said, it's real money. Its effects - unemployment, deindustrialization, indebtedness - can be complex, and are debatable. But the underlying reality isn't going away. And yes (soon to be) President Trump should do something about it.