U.S. Markets open in 1 hr 3 mins

Trump’s bad logic on 'bad trade deals'

Rick Newman

Somebody please tell Donald Trump: A trade deficit isn’t a loss. You could even argue it’s a gain.

The Republican presidential frontrunner has been railing against “bad trade deals” since declaring his candidacy last summer. And he’s amplified the criticism, if that’s possible, in recent weeks. “If you look at China, and you look at Japan, and if you look at Mexico … they’re killing us,” he said during the latest Republican debate on Fox News. “With China we’re going to lose $505 billion in terms of trade …. Mexico, $58 billion. Japan, probably about… $109 billion.”

Trump is talking about the annual U.S. trade deficit with those three countries—but the amounts in question are anything but losses. Trade occurs when one party buys something from another, and trade between countries has the same mutual benefit as trade between an individual consumer and a merchant: each side gets something they want. “They’re sending us goods and we’re sending them green pieces of paper,” says Patrick Newport, U.S. economist for forecasting firm IHS Global Insight. “I don’t see how that’s a loss.”

Trump's numbers, incidentally, are off. Here are the U.S. trade deficits with each country in 2015:

China: $366 billion

Japan: $69 billion

Mexico: $58 billion

Those numbers might seem high, but in an $18 trillion economy, they don't really worry economists. What does worry economists is Trump's plan to slap tariffs of 35% to 45% on imports from China and Mexico, a tax that would be passed along almost entirely to consumers. Trump's logic seems to be this: Low-wage countries where workers get paid a fraction of U.S. wages are basically undercutting American workers, and therefore ought to be punished. But his tariffs would punish Americans too, especially lower-income consumers who benefit most from cheap imports. Most economists decry the kind of protectionism Trump is calling for, because it props up inefficient firms, reduces the incentive to innovate and depresses living standards over time.

Even so, free trade has been controversial for years, especially during downturns when it seems like Americans who lose their jobs are suffering at the expense of foreign workers gaining jobs, usually for less pay. Trump is only the latest populist to blame unfair trade practices for the plight of many Americans who feel they’re falling behind. And he calls out name-brand companies who have recently decided to locate major facilities outside the U.S., including Ford (F), Carrier (UTX) and Nabisco (MDLZ).

Free trade can be tough to defend because the benefits to Americans—cheaper goods, stronger purchasing power and a more efficient economy—are spread broadly across the entire population. And those benefits are often intangible. Yet the costs of free trade, such as an individual company’s decision to close a U.S. factory and move it overseas, create concentrated loss that’s intuitively easy to understand. Free trade creates far more winners than losers, but the losers are more visible and often, more vocal.

The evidence that free trade has harmed the overall U.S. economy, however, is very thin. The United States has had an overall trade deficit—buying more stuff from foreigners than it sells to them—every year since 1976. Here's the data since 1960, with positive numbers being a surplus and negative numbers being a deficit:

Source: Bureau of Economic Analysis

Prolonged trade deficits obviously didn’t interfere with terrific booms in the late 1980s and late 1990s. The trade deficit peaked in 2006 at $762 billion, which was about 5.5% of GDP. That year was also the peak of the credit-fueled housing and spending boom; Americans were spending too much on imports because they were spending too much on everything--and borrowing to pay for it.

The trade deficit today has fallen to about $540 billion, or roughly 3% of GDP—nothing to worry about, most economists say. It’s true that incomes have stagnated and part of the middle class is falling behind. But that’s happening everywhere—including China and Mexico—and there’s no reason to think trade is to blame. “Our economy is doing better than any economy in the world right now,” Newport says. “If you grade on a curve, the United States gets an A. We’re not losing jobs to China or Mexico.”

Job growth, in fact, has been strong, with employers adding 242,000 jobs in January, slightly above the average of about 205,000 new jobs each month during the last year. Incomes are starting to rise and the portion of high-paying jobs in the economy is rising, according to Joe Brusuelas, chief economist at consulting firm RSM. If Trump's tariffs and other protectionist measures ever went into effect, they would harm most workers before helpeing them, if they helped at all. The logic might work if applied selectively in a rousing campaign speech, but in the real world, it fails.

Rick Newman’s latest book is Liberty for All: A Manifesto for Reclaiming Financial and Political Freedom. Follow him on Twitter: @rickjnewman.