I disagree strongly with the rhetoric and substance of Donald Trump and his top advisors when it comes to trade deficits. For example, Peter Navarro’s recent WSJ op ed (which relied on the accounting tautology Y = C+I+G+Nx) could just as well “prove” that increased government expenditures are the way to boost real GDP and create American jobs.
However, most free-market economists are bashing Trump & Co. nonstop on this stuff. So where I would like to make some points is going the other way, namely, where I think pro-free trade economists are putting forth non sequiturs that will actually do little to help the cause. I hope it goes without saying that my point here is to clarify our communication with the public, especially with people who are sympathetic to Trump & Co’s arguments for trade barriers.
In this current post, I want to focus on a recent post from AEI’s Mark Perry. I am going to give a screenshot of the title and then quote the entire post, because I want you to be sure I’m correctly conveying his argument. Perry wrote:
Here’s one way to look at our America’s international trade situation:
1. The US receives more of foreigners’ production of goods and services than they get of ours, which results in a net inflow of foreign-produced goods and services every year.
2. The US also receives more of foreigners’ investment capital than they get of ours, which results in a net inflow of investment capital from abroad.
Protectionists, Peter Navarro and Trump then complain about America’s “trade deficit” for merchandise, but never mention the surplus for services, nor the surplus of foreign investment capital.
Consider a country like Japan’s international trade situation.
1. Japan exports more of its domestically-produced goods and services to foreigners every year than it receives from abroad, which results in a net outflow of domestically-produced goods and services.
2. Japan also sends out more of its investment capital to other countries every year than it receives from abroad, which results in a net outflow of investment capital.
Protectionists, Peter Navarro and Trump then claim that they want the US to emulate Japan’s trade situation to “Make America Great Again.”
So that is the entirety of his post. I think it is entirely fair to summarize Perry’s argument as: “It is clearly advantageous to Americans that they are the recipients of both goods and capital. Only a fool would think it would help the country to transform that situation into one on which we are net exporters of both goods and capital. Yet that’s where Trump’s logic leads us, so he must be wrong.”
Now here’s my problem. Suppose a populist politician in Japan starts railing against the fact that they’re “getting killed by the Americans in our trade dealings.” He wants to pass a measure to “keep our savings here in Japan.”
In that case, surely Mark Perry and other economists would say that’s nonsense, that the voluntary transactions of Japanese manufacturers and investors only make the country richer. Nobody in Japan should look at their aggregate statistics about current account surpluses and capital account deficits and conclude that this is somehow dangerous for Japan.
But if that’s true–and it surely is–then Perry’s post above collapses. If a free trader would tell the people with a capital account deficit that they shouldn’t be worried about the situation, then free traders shouldn’t be telling Americans that having a capital account surplus is self-evidently a good thing.