Trump Must Have Skipped Out On Economics 101

He should best refrain from bashing bilateral trade deficits unless there is evidence of unfair trade practices.
05/31/2017 10:52 am ET Updated May 31, 2017
Pool via Getty Images

The President of the United States has been attacking countries that have large bilateral trade surpluses with the U.S. His latest target country has been Germany, probably because the German Chancellor, Angela Merkel, expressed her disappointment with his stand on NATO.

The theory of international trade is perhaps the best-known theory in economics—it is the Theory of Comparative Advantage, normally attributed to Ricardo /Torrens. It states that countries can benefit (more correctly cannot lose) by specializing in the production and export of goods where they have a comparative advantage and importing other goods. What is not immediately obvious is that the theory holds even if one country has an absolute advantage in the production of all goods — namely, what matters is comparative, not absolute, advantage. In the real world with many countries and many goods, the theory becomes multilateral and is adapted to a country’s overall exports and imports. Namely, a country should not look at its trade balance with one country but with the world (all countries) at large; it may have surpluses with some, deficits with others and be in balance with a few. Similarly, a country should not look at its balance on agricultural or manufactured goods; by definition it will be a net exporter of some goods and a net importer of other goods. This is taught in the first course in economics the world over.

President Trump had early on bashed Mexico and China (by far America’s largest bilateral deficit and at FIVE times the deficit with Germany) on their trade surpluses with the U.S. Now it is Germany’s turn! While it makes little theoretic sense to look at trade as a bilateral phenomenon, it is true that Germany has a large trade surplus with the US. Americans like German goods so we have a deficit with Germany while the people of Hong Kong like American goods and we have a surplus with Hong Kong.

But what can Germany do to reduce its trade surplus with the U.S.? Not much. Germans could be encouraged to consume more (as opposed to save) and in doing so, they would import and consume more American goods along with goods from other countries. American companies could better target German consumers. What could the U.S. do? Americans could consume less (save more) and thus import fewer goods, including goods from Germany. That’s about it! Simply said, Germans should consume more (import more) and Americans should consume less (import less) and American companies could better target German consumer tastes.

President Trump should best refrain from bashing bilateral trade deficits unless there is evidence of unfair trade practices. And in that case there are mechanisms through the World Trade Organization (WTO) for addressing them. Trade bashing rhetoric may be a good populist jingle but encourages protectionism, damages global business activity and strains bilateral relations.