Badly confused trade policy: the story of supply and demand

Dean Baker

Donald Trump is the world’s leading expert in getting things wrong and one thing he gets hugely wrong is the value of the U.S. domestic market. Trump seems to believe that our domestic market is incredibly valuable to the rest of the world and that access to it should allow him to extort large concessions from the rest of the world. This is a seriously wrong understanding of the world economy.

The basic point is a simple one, when other countries sell us things, they are essentially giving us a portion of what they are able to produce in return for dollar bills. Because they give us a portion of what they produce, they have less to consume or invest domestically. It’s sort of like if you bake a cake and give a slice to your neighbour, that leaves less for you and your family. In that sense, selling things to the U.S. makes them poorer.

This doesn’t mean they are hurt by the trade. They can use the dollars they get from the U.S. to buy stuff from us, or they can use it to buy things from third countries, or they can hold the dollars in reserve in case they are needed in the future. But at the most basic level, the more goods they sell to us, the less they have to use at home.

Suppose the U.S. president gets angry at a country and says that he won’t let them sell to the U.S. anymore. In this situation they have to figure out what to do with the goods they expected to sell to the U.S. They can look to sell them to another country or possibly use them at home. Both outcomes are somewhat worse from the standpoint of the country being sanctioned.

If they sell them to another country, they will likely get a lower price for their goods, otherwise they already would have been selling them there. If they use them at home, that could improve people’s living standards, but not as much as what they hoped to get from selling the stuff to the U.S. and doing something with the money.

But this is a short-term story. In the longer term they can look to alter their production to either meet domestic needs or to better fit the needs of a different foreign market.

But note that the issue here is excess supply. The problem is not that the exporting nation is not producing enough to meet its own needs; the problem is that it’s producing more of some items than is needed for its domestic market. If the U.S. blocks imports, the country doesn’t have a shortage of goods and services, it has excess supply.

This is the step that seems to go over Donald Trump’s head. If other countries needed the U.S. for some essential supplies – like food or oil – then the threat to cut off access could seriously cripple their economies, possibly for a long period of time. But Trump apparently thinks he can cripple foreign economies by not buying their stuff.

This sort of threat is at most a temporary problem. Countries can and will reorient their production to meet the needs of other markets and just leave the U.S. out of the picture.

Also, it is important to remember that countries never literally need someone to buy their stuff. That is a story of too little demand, which is the problem we confronted at the start of the Great Depression. But we learned a way of getting out of this problem — it’s called “spending money.”

We did that in a huge way when the U.S. became embroiled in World War II in 1941. That quickly eliminated our problem of too little demand. But it was the spending, not the war, that did the trick. If we had the political support for it, we could have done massive spending in 1931 on things like building up infrastructure, and improving our health and education systems. That would have ended the depression a
decade sooner.

China is in a similar situation today where its major economic problem is too little demand. It can address this problem by helping other countries to get over their transition from dependence on the U.S.. Of course, it can also meet the problem by spending more at home, for example improving its health care and Social Security systems. They also could send everyone a $2,000 check, like we did during the pandemic. If President Xi has a sense of humour, he could even put Donald Trump’s name on the check.
But the basic story is the world can find other ways to meet any demand shortfalls it faces. And when it comes to supply, there is little that the U.S. produces which other countries could not replace elsewhere.

This is the aspect of the trade story that makes Trump so upset. We import $4 trillion in goods and services each year, but only export $3 trillion. If we run down the list of exports from the U.S. most items can be replaced reasonably quickly. We export roughly $300 billion worth of petroleum products, which accounts for 15 percent of our goods exports. A world rapidly moving towards clean energy would be able to survive without this oil, if Trump chose to eat it himself rather than sell it.

The U.S. also exports a lot of planes and capital equipment. European, Chinese, Brazilian, and Indian manufacturers would be happy to fill this gap. On the service side, one fifth of our exports are represented by tourists coming to the U.S. Most foreign tourists would probably be fine going to a country that is not an international pariah. Another big item is travel on U.S. airlines. There are plenty of non-U.S. airlines that could carry these passengers instead. And there exists another $140 billion in payments for patents and copyrights, fees that I’m sure other countries could live without if the U.S. goes rogue.

The simple story here is that if Trump is determined to act like an idiot in dealing with international trade, he can create short-term disruptions. But in the longer term, the rest of the world could survive just fine without the U.S. market.
In that story, the U.S. economy will be the big loser. Trump with his various scams may be just fine. His rich friends with their big tax cuts may come out alright also, but most ordinary working types will likely be looking at lower standards of living. The U.S. market is not the big prize Trump thinks it is, and we will likely pay a big price for Trump’s confusion on this issue.

Source: Real World Econ Rev, 1 Feb 25
https://rwer.wordpress.com/2025/02/01/donald-trump-is-badly-nonfused-67218-the-story-of-supply-and-demand/