Trade isn’t money for nothing

Stephanie Kelton

On 16 December 2024, the president-elect Donald Trump returned to a familiar grievance: accusing our trading partners of financially ripping us off. Here’s part of what he said at the time:

When it comes to understanding pres. Trump’s trade grievance, it’s all about the Benjamins. He hates the idea of “losing money” to Mexico and Canada.

You might remember that this was a major theme when Trump ran for president the first time. He was convinced that NAFTA was a disaster – and in many ways it was – and he pledged to replace it with a trade arrangement that would protect America’s interests. A few years later, as president, Trump signed the United States-Mexico-Canada Agreement (USMCA) into law. Here is how he celebrated the new and supposedly-very-much-improved trade deal:

“[W]e just ended a nightmare known as NAFTA…And we now have a brand new U.S.-Mexico-Canada Agreement. It’s a whole different ballgame, and it’s going to be … incredible for Michigan and for every other place within our country.

The USMCA is the fairest, most balanced, and beneficial trade agreement we have ever signed into law. It’s the best agreement we’ve ever made, and we have others coming. And, by the way, the China deal was recently signed. And that’s going to bring $250 billion into our country…
We’re very grateful to be joined with – some special people who came today: Ambassador Robert Lighthizer. Where is Bob? What a job you’ve done. What a job. He did this deal. He did China. He did Japan. They all worked together. But fantastic job. He worked night and day to complete this outstanding agreement.”

It was supposed to help us start “winning” at trade, but here we are being told once again that the U.S. is getting ripped off by Mexico, Canada, etc.

Who Are You Calling a “Loser”?
I wrote about Trump’s peculiar way of thinking about “winning” and “losing” at trade in my book The Deficit Myth.

Here is the introduction to Chapter 5 in my book:
I remember watching Donald Trump battle his way through the Republican primary debates with my son, Bradley, who was nine years old at the time. It was 2015, and Trump was blustering on about trade, complaining that countries like Mexico, China, and Japan were ripping us off and vowing to bring an end to the thievery if voters would put him in the White House. It became a central theme of his campaign: We are losing the trade war against foreigners. “We don’t win anymore,” he thundered during a 2015 primary debate in Cleveland, Ohio. “We don’t beat China in trade. We don’t beat Japan, with their millions and millions of cars coming into this country, in trade.” It’s a message that has resonated with millions of Americans, especially in states like Ohio, Michigan, Pennsylvania, North Carolina, and Wisconsin, where many voters traced the hollowing out of their communities and the loss of good-paying jobs to import competition and rising trade deficits.

As U.S. president, Trump remained obsessed with the gap between imports and exports, that is, America’s trade deficit with the rest of the world. To him, the trade deficit is prima facie evidence that America is losing at trade. On the one hand, he sees the losses in monetary terms, tweeting, “The United States has been losing for many years, 600 to 800 billion dollars a year on Trade. With China, we lose 500 billion dollars. Sorry, we’re not going to be doing that anymore!” The problem, he seems to believe, is that foreigners are running off with our money. And when he looks at the real terms of trade – the actual goods that are being traded between Americans and foreigners – he sees that America is getting the raw end of the trade deal. In exchange for the millions of cars that Japan is sending us, Trump explained in August 2019, “We send them wheat, wheat. That’s not a good deal.” At that point, my son, Bradley, then thirteen, turned to me looking puzzled and said, “So, the problem is that we take their cars and they only take our wheat? That would be like me giving Ian two of my low-value trading cards and getting ten of his high-value cards in exchange. I would be very happy with that deal!”

Viewed from this perspective, you could say that a country “wins” by maximizing its benefits (imports) and minimizing its costs (exports). But that would imply, counterintuitively, that America’s roughly $700 billion trade deficit is evidence that the U.S. is already winning at trade. Could this be right? Does Trump have it completely backward? Instead of using tariffs to wage a trade war aimed at reducing the volume of goods coming into the U.S., should the US be trying to run even bigger trade deficits? Would that make us the undisputed global trade champion? As should be apparent, it’s much more complicated than the simple black and white picture of winning and losing at trade.

If you read the rest of chapter 5 in my book, you’ll discover that international trade is a huge and very complex issue, with consequential and sometimes brutal impacts on workers, developing countries, and our environment.

Still, Trump is missing the forest for the trees when he complains about the U.S. losing money to Canada and Mexico. Our trading partners aren’t getting money for nothing. It should be obvious, but apparently it isn’t.

Source:
Stephanie Kelton; The Lens, 17 Dec 2024  https://stephaniekelton.substack.com/p/trade-isnt-money-for-nothing
Reproduced with the author’s permission.

Prof Stephani Kelton is a U.S. heterodox economist, a leading proponent of modern monetary theory, and an ERA patron.