Everything Trump Says About Trade With China Is Wrong

Being sane and strapped for time, I have resisted analyzing Donald Trump’s international trade policy out of the conventional belief—since proven wrong—that he would fade from the political limelight in 2016. But since Trump is apparently here to stay and has amplified his trade rhetoric, a review of one of those plans—to impose high tariffs on Chinese goods—is now warranted. So here we are, and what a disaster this plan is.

There really is no sugarcoating it: almost everything that Donald Trump has proposed on U.S.-China trade—for example, during last Thursday night’s GOP debate, in a recent the New York Times interview, and on his website—is wrong.

Very, very wrong.

Review the Underlying Facts

First, the entire premise of Trump’s plan to retaliate against China is erroneous. Trump cites the U.S.-China trade deficit as proof that the dominant Chinese, via pernicious currency manipulation, are taking weak America’s manufacturing jobs, thereby justifying his tariff plans.

However, as I explained in The Federalist last fall, the U.S. manufacturing sector has been (until the last month or so) setting production (and export!) records, and almost 90 percent of the decline in U.S. manufacturing jobs between 2000 and 2010 was caused by productivity gains (robots and computers), rather than import competition.

In fact, a recent Ball State study found that, “Had we kept 2000-levels of productivity and applied them to 2010-levels of production, we would have required 20.9 million manufacturing workers. Instead, we employed only 12.1 million.” So unless Trump wants to destroy all the robots, those jobs just aren’t coming back, tariff or not.

Furthermore, the idea that the U.S.-China trade balance proves that we’re “losing” at trade is the height of economic ignorance. For one thing, there’s actually a strong correlation between U.S. economic growth and an expanding U.S. trade deficit. As Cato’s Dan Griswold wrote:

An examination of the past 30 years of U.S. economic performance offers no evidence that a rising level of imports or growing trade deficits have negatively affected the U.S. economy. In fact, since 1980, the U.S. economy has grown more than three times faster during periods when the trade deficit was expanding as a share of GDP compared to periods when it was contracting. Stock market appreciation, manufacturing output, and job growth were all significantly more robust during periods of expanding imports and trade deficits.

Moreover, basic economics teaches us that trade balances reflect national savings, consumption and investment, not trade policy. Thus, every dollar traveling overseas to buy imports (in excess of our exports) eventually comes back to the United States in the form of investment, and our “trade deficit” is matched by a “capital account surplus.” In other words, we buy goods and services from foreigners, and they buy an equal amount of our exports plus our financial assets (aka foreign investment in the United States).