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What Accounts for Trump’s Trade Tales?

Trump and his protectionist trade triumvirate are not only ignorant of the basic tenets of economics, they are ignorant also of the basic tenets of accounting.  Commerce-secretary designate Wilbur Ross, for example, routinely insists that “it’s ECON 101” that trade deficits reduce GDP.  But he’s deeply mistaken.

First, a U.S. trade deficit means that investments are flowing into the American economy; such investments generally fuel the future growth of the U.S. economy.  Second, and at a more fundamental level, the practice of subtracting imports (“M”) from the GDP equation [GDP = C + I + G + X – M] – while giving Ross the impression that trade causes GDP to fall if the value of imports exceeds the value of exports – is done simply to avoid double-counting, as Pierre Lemieux explains here.  (You must scroll down to get to Pierre’s article.)

And now we learn that an equally egregious failure to understand accounting is causing Trump and his trade triumvirate to fantasize that reported U.S. trade-deficit figures are too low.  Here are the opening paragraphs from a report in the Wall Street Journal:

The Trump administration is considering changing the way it calculates U.S. trade deficits, a shift that would make the country’s trade gap appear larger than it had in past years, according to people involved in the discussions.

The leading idea under consideration would exclude from U.S. exports any goods first imported into the country, such as cars, and then transferred to a third country like Canada or Mexico unchanged, these people told The Wall Street Journal.

Economists say that approach would inflate trade deficit numbers because it would typically count goods as imports when they come into the country but not count the same goods when they go back out, known as re-exports.

In short, if this Trump proposal is adopted, an automobile that is shipped to America for re-shipment, say, to Canada will be counted as an American import but not as an American export.  This practice would be accounting fraud – in particular, a fraud perpetrated on the American public to only further frighten it into hysteria about so-called “trade deficits.”

A good case can be made for counting such goods as being neither imports nor exports, or (as is the current practice) for counting such goods as being both imports and exports.  But it is simply fraudulent to count such goods as being one or the other but not both.  Our hypothetical automobile shipped to America for reshipment to Canada is clearly not a good meant for sale in the American market – that is, it’s not really an American import.  And so while it’s true that this good is not produced in America – and so might be said to not really be an American export – because it is counted as an American import when it arrives in America it must, if balance-of-trade figures are to have any accuracy at all, also be counted as an American export when it is shipped out.

And yet the Trump team wishes to further defraud the American public about trade by monkeying with balance-of-trade accounting.

The accounting move proposed by Trump and his gang is no more legitimate than would be a proposal to stop counting such trans-shipped goods as imports but to continue to count them as exports.  Such an accounting change would magically reduce the U.S. trade deficit – just as Trump’s proposal would magically increase the U.S. trade deficit.  Yet neither move would be honest; each move would be fraudulent; each move would purposely cause balance-of-trade figures to be even more misleading than they already are.  And, of course, neither of these moves – except insofar as it might cause trade policy to change – would have, and would reflect, no real economic consequences.

Trump should be further exposed and ridiculed for the lying fraud that he is – on top of being exposed as an economic imbecile.