President Donald Trump likes to talk about the trade deficit as if it were the score of a football game — with the home team, of course, losing.
This us-against-them view of the trade deficit is the primary reason why Trump is imposing steel and aluminum tariffs on countries that, in his view, take advantage of the United States. He sees himself as a referee, enforcing new rules to give the home team a better chance.
The trouble is, trade isn’t a team sport pitting the citizens of one country against the citizens of another. It’s a series of voluntary exchanges, each of which happens because it benefits people on both sides.
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Suppose you buy a jacket made in Vietnam. You have a trade deficit with Vietnam, but no one there treated you unfairly. Presumably you like the jacket and the price.
OK, the Trump supporters might argue, but shouldn’t trade be in balance overall? As individuals, we can run domestic trade deficits with the supermarket, the phone company and the gas station, but we pay for them by running a trade surplus with our employer.
Things aren’t so simple at the international level. The U.S. has run consistent trade deficits for decades for reasons that have nothing to do with unfair practices or exploitation.
The U.S. economy has often been stronger than those of its large trading partners, and imports surge when consumers are spending freely. In the past 15 years, our lowest trade deficit was in the recession year of 2009.
“If the source of the deficit is relative economic strength in the U.S., it’s not a symbol of losing,” says Steven Fazzari, a professor of economics at Washington University.
A strong dollar also inflates the trade deficit by making foreign goods cheaper and U.S. products more expensive. In a simple classical economic model, a trade deficit would cause the dollar to fall until exports equaled imports.
That hasn’t happened, because foreigners like owning U.S. assets. Our Treasury bonds are the world’s safest and most liquid, and our stock market features many of the world’s most dynamic companies.
“The U.S. can run deficits more than any other country because of the perception of the dollar as an international reserve currency,” Fazzari explains. “The trade deficit is an economic variable that’s driven by a complex set of things.”
Other nations’ policies do have an effect. China, Germany and Japan have prioritized export-led growth over domestic consumption.
Persuading them to adopt a more balanced approach should be a U.S. goal, but it’s not clear that Trump’s tariffs will have that effect.
They may not even reduce the trade deficit. The tariffs will make U.S. steel and aluminum more competitive, but they’ll hurt manufacturers of downstream products. We may end up importing less steel and aluminum but more cars and appliances.
Missouri, by the way, could be hit hard by Trump’s tariffs. According to a report by the Brookings Institution, aluminum and steel make up 7.4 percent of the state’s imports, the highest figure for any state.
The U.S. Steel workers who just got their jobs back in Granite City are clear beneficiaries of the tariffs. Metal-using manufacturers such as Boeing and General Motors will probably be losers.
If we want to think of trade as a sport, our home team consists of diverse players with often-competing interests.
A president who’s determined to keep score using a number he doesn’t understand, and often exaggerates, is likely to hurt the team more than he helps it.