Here’s a letter to National Review.
Editor:
Jim Geraghty makes several excellent points in his critical assessment of Trump’s protectionist assault on Canada – which, of course, is also an assault on Americans’ economic freedom and standard of living (“The Canadian Menace,” August 28). But one further point, missed by Mr. Geraghty, warrants mention. It’s one that exposes a fundamental contradiction in Trump’s protectionism.
Mr. Geraghty quotes the White House’s complaint that “Canada also administers these [automobile-import] quotas in a way that compels U.S. auto companies to invest in production in Canada instead of the United States.”
Given Mr. Trump’s decades-long obsession with reducing U.S. trade deficits, the White House should regard this Canadian policy not, as it does, as a reason to punish Canadians with tariffs, but instead as a blessing – as Canadian cooperation with the president at reducing U.S. trade deficits.
When we Americans increase our investments abroad, our long-running capital-account surplus – which is the excess of foreign investment in the U.S. over U.S. investment abroad – shrinks. By the rules of international commercial accounting, a shrinking U.S. capital-account surplus is necessarily accompanied by a shrinking U.S. current-account deficit. Because trade deficits are by far the largest component of U.S. current-account deficits, a shrinkage of U.S. current-account deficits puts downward pressure on U.S. trade deficits.
More simply, when we Americans invest more of our savings abroad, we have fewer savings to spend on imports. Other things equal, the U.S. trade deficit shrinks.
The bottom line is that, according to the White House’s own professed objective, Canada is helping America: By encouraging us to invest more of our savings abroad, it puts downward pressure on the very trade deficit that Mr. Trump claims to be determined to reduce. Yet he responds by slapping Canada with higher tariffs. A clearer example of the internal contradiction in Trump’s protectionist policy is difficult to imagine.
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
