Trump misunderstands US Trade-Deficit Economics

Donald Trump on the trade deficit with China

Ignorance often leads politicians to make completely wrong accusations. Adopting free trade has always been a consensus among economists and protectionism is way behind the trend. It is a widely shared view that past major trade deals have benefited most Americans. However, Bernie Sanders proudly proclaims that he has voted against every United States trade agreement starting with the North American Free Trade Agreement. Donald Trump claims that we’re getting ripped off by China, Japan and Mexico and those countries are “beating us economically.”

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(Source:  Bureau of Economic Analysis)

Trade deficits do not mean we are “losing” to China, Mexico and Japan ,let alone that the figures that Donald mentioned in the interview about the trade deficits are exaggerated. It might never occurs to Trump that when he manufactures his clothing line in Mexico and China, he also contributes to the trade deficit. Obviously it does not mean that he is losing. In the contrast, he is benefiting from the low production costs of China’s textile industry. and that is where comparative advantages kicks in. Then the lower retail prices will also benefit American consumers.


Trade deficits are caused by a low ratio of domestic savings to investment. In fact, China’s savings to investment ratio is high because Chinese people don’t have much welfare.

It is true that China gained a net amount of $366 billion worth of U.S. currency, the exact amount of the trade deficit. But in fact those dollars quickly came back into the U.S. as a capital inflow to purchase America’s financial assets like corporate stock and bonds, real estate, bank deposits and Treasury securities, and as foreign direct investment in America’s factories and businesses.

What most people don’t usually see is that once all of the cash inflows and cash outflows every year for both merchandise and financial assets are accounted, America’s trade deficit is offset by a corresponding “foreign investment surplus,” and there is no net loss.

Therefore, Americans shouldn’t think of trade deficits as losing to countries such as China, but rather as “inflows of foreign investment capital that strengthen America’s economy”. The resulting capital flow to the U.S. economy reflects a confidence in America’s underlying strength and doesn’t result from the inability to sell goods in a competitive global market.Also when Chinese people have a standard of living that is more like that of Americans, America will have a more balanced trade with China.
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Trump wants to put a heavy tariff on Chinese goods and claims that China is doing the same. That is not true. For most industries, China’s tariff is not very high and China has been reducing the tariff on consumer goods to better their people’s lives. To wage a trade war against China will not benefit American economy but actually do great harm to it. In the short-run, trade has some cost–some American businesses may close and some workers may lose their jobs. But in the long run, trade is a win-win and will make American economy stronger and more competitive.








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2 Responses to Trump misunderstands US Trade-Deficit Economics

  1. gloriaddai says:

    Your article makes a very interesting and educative reading. I like the points you have raised. In addition to the points you have highlighted, I belief most people especially our politicians have a clouded idea of what trade between countries actually is about.
    There is the misconception that countries are competing against one another in the world market as that of companies in the same business. But we need to understand that trade is about mutual benefits. Its mostly about comparative advantage; what US can get from china cheaper than it cost it to produce and vice verser (Ricardian trade model).
    Most importantly, most people( especially Donald Trump) make the mistake of measuring benefits solely by trade balance. If we begin to measure it from the point of relative changes in our GDP growth and not compare it with that of other countries, we can really appreciate the benefits that international trade bring and not chant “if i am elected president, i will take back our jobs from china and build a wall between US and Mexico and make the people of Mexico pay for it”

  2. bryanchai says:

    This is an interesting point that trade policies are sometimes affected by political reasons. However, people like Trump and their business actually benefit from cheap Chinese imports but have to come up some strange views to attract public attention.
    Although US’s huge trade deficit could affect output and employment in certain industries, many downstream sectors and most US consumers benefit a lot from cheap global imports. Besides, free trade also allows US capitals flow to emerging markets more easily.
    Personally, I put close attention to the current presidential election and corresponding future trade policies in US to see whether these candidates do follow their plans.

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