Here’s a note to a new correspondent:
Mr. W__:
Thanks for your e-mail.
You write that “President Trump can be forgiven for thinking American trade deficits with Mexico and with Canada are signs of them taking advantage of us. He’s a business man and no business man wants to see his company spending more than it earns. I see where he’s coming from.”
With respect, I disagree. Trump’s business background arguably explains his hostility to U.S. trade deficits with the rest of the world – that is, with all other countries – but not with individual countries.
Many businesspeople falsely suppose that the American economy is a for-profit corporation that must turn a monetary profit, and that trade deficits with the rest of the world mean that America, Inc., is suffering losses rather than earning profits. Although profoundly mistaken, this notion is one that an economically ill-tutored businessperson easily falls for.
But no competent businessperson believes that every supplier to his or her firm should purchase from that firm at least as much as that firm purchases from them. Boeing’s CEO would lose his job immediately if he threatened to have Boeing stop doing business with any Boeing supplier – including each of its workers – who does not commit to buying from Boeing at least as much as Boeing buys from that supplier. Yet Trump’s complaint about the U.S. having a trade deficit with Canada, Mexico, and other individual countries is the equivalent of this imaginary destructive stupidity by Boeing’s CEO.
Just as no business expects to have “balanced trade” (and much less a “trade surplus”) with every individual supplier, even if we for a moment embrace the mercantilist fallacy that a national economy is a for-profit corporation, no country (in our world of more than two countries) should expect to have “balanced trade” (or a “trade surplus”) with every individual country. That Trump thinks otherwise is perhaps the most devastating evidence yet of his utter ignorance of the economics of trade.
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
