U.S. Markets closed

Trump’s big mistake on trade

Rick Newman
Senior Columnist

When you buy something at a store, you hand over money and get a product in return. You end up with fewer dollars, but it doesn’t matter, because you voluntarily paid for something you wanted. The transaction works for both sides.

The same thing happens in international trade. Americans bought $506 billion worth of goods and services from China in 2017, and China bought $130 billion worth of goods and services from the United States. They got stuff they wanted. We got stuff we wanted. Buyers and sellers made transactions on terms they all agreed to.

President Trump sees it differently. He tweeted recently that the United States is “down” $500 billion in its economic relationship with China, and he insists the United States is “losing” hundreds of billions of dollars per year to China. He wants to close the gap between what China buys from us and what we buy from them by at least $100 billion per year—and he seems willing to roil financial markets with tariffs and other protectionist measures he thinks will get the job done.

But Trump’s logic is faulty. “It’s economically ignorant,” says economist Donald Boudreaux of George Mason University. “We’re not giving foreigners anything. We’re buying things from them that we think are good deals. It’s a total myth to think the trade deficit is somehow a drain on our assets or a drain on aggregate demand from the US economy.”

Trade is complicated, and Trump’s real interest seems to be protecting jobs in industries where production has shifted to China and other countries during the last several decades. The idea behind tariffs is that taxing imports will make them more expensive, making domestically produced goods more affordable by comparison. So consumers will buy more domestic stuff, in theory, which should boost the number of jobs for workers who make that stuff.

Reality is messier, as we are in the midst of learning. In response to the tariffs Trump wants to levy on Chinese imports, China has said it will impose similar tariffs on US imports to China. So products are getting more expensive in both countries, which will lead millions of consumers and thousands of businesses to change what they buy. The potential upheaval has pushed stock prices down and triggered fears of escalating protectionism. “The China-US tariffs war is alarming,” David Kotok, chairman of financial firm Cumberland Investors, wrote to clients on April 4. “Trump’s trade policy is failing and harming the United States.”

Trump seems fixated on the dollar value of America’s trade deficits with China, Mexico and other countries we do business with. But there’s nothing inherently wrong with a trade deficit, and there’s no such thing as the “right” amount of trade deficit, or surplus, because money Americans spend on foreign goods gets circulated throughout the global economy—and often ends up back in the United States. China, for instance, buys US government debt, which keeps interest rates lower than they’d be if China weren’t a purchaser and demand was weaker. Chinese consumers buy real estate in the United States and shares of US companies. Some Chinese firms invest directly in the United States, as Foxconn, for instance, will do when it builds a new factory in Wisconsin.

There are some legitimate problems in America’s trade relationship with China. There’s a convincing amount of evidence that China does cheat on trade, by subsidizing home-grown industries, for instance, which allows them to “dump” products on the global market at prices that don’t cover the cost of production. China also aggressively seeks Western trade secrets, in ways that are sometimes illicit. But there are also established ways to address these problems, such as seeking remediation at the World Trade Organization. The United States also has the right to impose tariffs on a product-by-product basis when it determines that foreign producers are engaged in unfair trade practices—as the United States has done regularly, for years.

It’s also true that global trade does hurt some workers, as production gets moved to places where it can be done more efficiently. Research by economists David Autor, David Dorn, Gordon Hanson and others has identified dozens of US communities where the shift of jobs to China has hollowed out industries, including furniture, toys, sporting goods, electronics and many others.

But free-market economies change constantly, with jobs continuously destroyed and created. Economists are generally skeptical of policies meant to protect certain types of jobs, because they depress growth and inhibit the creation of new jobs. “You freeze in place yesterday’s technologies, and you prevent tomorrow’s technologies from emerging,” says Boudreaux. “You’re protecting jobs the market is saying are now defunct.”

That doesn’t mean workers have to become obsolete once their jobs do. Policies that promote job retraining, relocation aid and stronger connections with local employers can help workers stay relevant, without the damaging effects of tariffs or other types of protectionism. But Trump has shown little interest in such wonky policies, preferring high-profile moves more likely to generate headlines—even if they’re negative.

Confidential tip line: rickjnewman@yahoo.com. Encrypted communication available.

Read more:

Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman

Follow Yahoo Finance on Facebook, Twitter, Instagram, and LinkedIn

  • Marijuana Stocks to Watch in October -- and Into 2019
    Business
    Motley Fool

    Marijuana Stocks to Watch in October -- and Into 2019

    Tomorrow, Wednesday, Oct. 17, Canada will become the first industrialized county in the world where marijuana is legal for adult recreational use -- and only the second country, along with Uruguay, where such use is legal.  Not only does this open up

  • Lockheed Martin (LMT) Q3 Earnings Preview: What's in the Cards?
    Finance
    Zacks

    Lockheed Martin (LMT) Q3 Earnings Preview: What's in the Cards?

    The market expects Lockheed Martin (LMT) to deliver a year-over-year increase in earnings on higher revenues when it reports results for the quarter ended September 2018. This widely-known consensus outlook is important in assessing the company's earnings picture, but a powerful factor that might influence its near-term stock price is how the actual results compare to these estimates. The stock might move higher if these key numbers top expectations in the upcoming earnings report, which is expected to be released on October 23.

  • 7 Stocks to Buy and Hold Through Any Market Selloff
    Business
    InvestorPlace

    7 Stocks to Buy and Hold Through Any Market Selloff

    Last week’s market collapse made headlines throughout the world. Since the sharp correction has negatively impacted virtually all investment sectors, you’re going to find discounted deals everywhere you look.

  • Goldman Sachs and Raymond James cut Netflix price target ahead of earnings
    Business
    Yahoo Finance Video

    Goldman Sachs and Raymond James cut Netflix price target ahead of earnings

    Netflix getting its price target slashed by both Goldman Sachs and Raymond James ahead of its highly expected earnings report tomorrow. Both firms are concerned that rising interest rates could pinch the company’s valuation.

  • Bill Gates Mourns His Microsoft Co-Founder Paul Allen: 'Personal Computing Would Not Have Existed Without Him'
    Business
    Fortune

    Bill Gates Mourns His Microsoft Co-Founder Paul Allen: 'Personal Computing Would Not Have Existed Without Him'

    Microsoft co-founder Paul Allen’s death yesterday was met with mourning from people who remembered him for his various business ventures, philanthropic work, and sports enthusiasm. Bill Gates, who co-founded Microsoft msft with Allen, was among them. From our early days together at Lakeside School, through our partnership in the creation of Microsoft, to some of our joint philanthropic projects over the years, Paul was a true partner and dear friend.

  • Saudi Arabia using the 'oil weapon option' could cause prices to soar to $150
    World
    Business Insider

    Saudi Arabia using the 'oil weapon option' could cause prices to soar to $150

    Analysts see a 1973-style embargo as unlikely, but warn oil prices could hit triple-digits if tensions escalate. "We believe that Saudi leadership would be extremely reluctant to exercise the oil weapon option, as its reputation as the world’s stable, reliable oil central banker would be severely undercut," RBC analysts wrote in a research note.

  • Finance
    CNBC

    Disney vs Netflix: Here's which stock would have made you richer if you invested $1,000 10 years ago

    On October 16, 1923, Walt and Roy Disney founded The Walt Disney Company and, nearly a century later, the company is one of the largest and most successful media conglomerates in the world. The answer is Netflix. According to CNBC calculations, a $1,000 investment in Netflix in October 2008 would be worth more than $97,560 as of after the earning bell on Monday, or more than 96 times as much, including price appreciation and dividends reinvested.

  • Where Will NVIDIA Be in 5 Years?
    Business
    Motley Fool

    Where Will NVIDIA Be in 5 Years?

    At one time, NVIDIA (NASDAQ: NVDA) floated under the radar in the technology sector. Its graphics processing units (GPUs) were then niche tech products that appealed mainly to graphic artists and hardcore PC gamers, but that all changed over the last

  • Price Target Update for Canopy Growth in October
    Business
    Market Realist

    Price Target Update for Canopy Growth in October

    How Analysts Rate These Cannabis Stocks in October (Continued from Prior Part) Canopy Growth Without a doubt, Canopy Growth (CGC)(WEED) has been one of the hottest cannabis stocks on the market (MJ). The company is one of the most valuable companies,

  • Forget Gilead Sciences: Intercept Pharmaceuticals, Inc. Is a Better Growth Stock
    Business
    Motley Fool

    Forget Gilead Sciences: Intercept Pharmaceuticals, Inc. Is a Better Growth Stock

    Gilead Sciences (NASDAQ: GILD) has clearly lost its luster as a growth stock over the last three years, thanks to a suite of setbacks for its oncology and hepatitis C franchises, as well as an increasingly competitive HIV marketplace. Gilead's stock, for instance, has woefully underperformed the broader biotech landscape during the past 36 months. With a price-to-sales ratio of 18.9 at present, Intercept's stock might not look like an outright bargain.

  • Three local Sears, Kmarts to close in latest round as retailer files for Chapter 11
    Business
    American City Business Journals

    Three local Sears, Kmarts to close in latest round as retailer files for Chapter 11

    Sears Holdings Corp. (NASDAQ: SHLD) announced Monday it will close 142 unprofitable Sears and Kmart stores by the end of the year, including three in Greater Washington, as the struggling Illinois-based retailer attempts to right its financial ship via bankruptcy proceedings. The Kmart at Springfield Plaza, the Sears at 15700 Emerald Way in Bowie and the Kmart at 6163 Oxon Hill Road in Oxon Hill will liquidate their inventory and shutter.

  • A Google self-driving car reportedly caused a crash in 2011 after a former engineer changed its code to drive where it wasn't supposed to (GOOG, GOOGL)
    Finance
    Business Insider

    A Google self-driving car reportedly caused a crash in 2011 after a former engineer changed its code to drive where it wasn't supposed to (GOOG, GOOGL)

    Before Anthony Levandowski was accused of stealing trade secrets from Google sister company Waymo, he worked on Google's in-house self-driving car unit, nicknamed Project Chauffeur. Former Google executives claimed that Levandowski ignored safety concerns, including in one instance where he allegedly took a self-driving car on an off-limits route.

  • JCPenney Stock: Do Analysts Foresee Any Upside?
    Business
    Market Realist

    JCPenney Stock: Do Analysts Foresee Any Upside?

    Can New CEO Bring JCPenney Back on Track? (Continued from Prior Part) Consensus “hold” rating Most analysts currently have a “hold” recommendation for JCPenney (JCP) stock. The mid-tier department store chain was rated a “hold” by 75%, or 12 out of 16

  • These are the bad things about early retirement that no one talks about
    News
    MarketWatch

    These are the bad things about early retirement that no one talks about

    For all the glamour of living an early retirement lifestyle, there are plenty of negatives I’ve come to discover since I permanently left my job in 2012. As a result, you’re repeatedly forced to will yourself into action.

  • Jamal Khashoggi was accidentally killed during interrogation: report
    World
    Fox Business Videos

    Jamal Khashoggi was accidentally killed during interrogation: report

    Fox Business foreign policy analyst Walid Phares on the report that Saudi journalist Jamal Khashoggi was accidentally killed.

  • 3 Top Large-Cap Stocks to Buy in October
    Business
    Motley Fool

    3 Top Large-Cap Stocks to Buy in October

    If you're looking for high-quality large-cap stocks to add to your portfolio this month, three of our Motley Fool contributors have some ideas. Here's why you should consider Berkshire Hathaway (NYSE: BRK.B), Cisco Systems (NASDAQ: CSCO), and AT&T (NYSE: T). Tyler Crowe (Berkshire Hathaway): Perhaps one of the most ridiculous investment takes out there right now is that Berkshire Hathaway's immense cash pile isn't a good thing.

  • A Look at AT&T’s Dividends
    Business
    Market Realist

    A Look at AT&T’s Dividends

    What Investors Should Know about AT&T’s Growth Prospects (Continued from Prior Part) Shareholder returns Increasing capital returns to shareholders is one of AT&T’s (T) main priorities. In the second quarter, the company returned $3.1 billion to shareholders

  • Even With $80 Oil, You Should Avoid These 3 Stocks
    Business
    Motley Fool

    Even With $80 Oil, You Should Avoid These 3 Stocks

    Three oil and gas stocks that truly stick out as companies with a "stay away" label are independent oil and gas producer SandRidge Energy (NYSE: SD), equipment and services provider Weatherford International (NYSE: WFT), and pipelines and logistics specialist Buckeye Partners (NYSE: BPL).

  • Business
    Benzinga

    Jim Cramer Advises His Viewers On Cisco, Microsoft And More

    On CNBC's "Mad Money Lightning Round", Jim Cramer said Microsoft Corporation (NASDAQ: MSFT) can still be bought, but only a half of a position. United Technologies Corporation (NYSE: UTX) is going to be stuck until it buys Rockwell Collins, Inc. (NYSE

  • Is Constellation Brands a Buy?
    Business
    Motley Fool

    Is Constellation Brands a Buy?

    At a glance, Constellation Brands (NYSE: STZ) appears to have all the characteristics of an attractive stock investment. The alcoholic beverage giant recently announced healthy second-quarter earnings results that showed robust market share growth in its beer segment and weaker -- but still positive -- trends in wine and spirits. Constellation Brands produces and sells alcoholic beverages.

  • KMI, EPD, ETE, and OKE: Key Midstream Rating Updates
    Business
    Market Realist

    KMI, EPD, ETE, and OKE: Key Midstream Rating Updates

    MLPs Fell Last Week, Outperformed the Broader Markets (Continued from Prior Part) Credit Suisse updated its ratings Credit Suisse updated its ratings on several MLP and midstream stocks last week. Credit Suisse started coverage on Plains All American

  • 3 Marijuana Stocks to Buy in October
    Business
    Motley Fool

    3 Marijuana Stocks to Buy in October

    If you've been trading marijuana stocks hoping to make a lot of money fast, stop it. Three that I think fit the bill are CannaRoyalty (NASDAQOTH: CNNRF), Canopy Growth (NYSE: CGC), and Scotts Miracle-Gro (NYSE: SMG). Here's why these look like great marijuana stocks to buy in October.

  • The Largest Private Employer in the World May Soon Sell Marijuana Products
    Business
    Motley Fool

    The Largest Private Employer in the World May Soon Sell Marijuana Products

    With literally hours remaining, Canada is set to lift the curtain on nine decades of recreational marijuana prohibition tomorrow. This makes Canada the first industrialized country in the world to legalize adult-use weed. As you might rightly imagine, investors can't wait for this legalization to take place.

  • KKR executives pull out of Saudi conference - sources
    World
    Reuters

    KKR executives pull out of Saudi conference - sources

    (Reuters) - Joseph Bae, co-president and co-chief operating officer of private equity firm KKR & Co LP, and David Petraeus, chairman of the KKR Global Institute, have withdrawn from the Future Investment Initiative conference to be held in Saudi Arabia

  • Down 28% In 3 Months, Will Facebook Stock Ever Recover? 1 Analyst Thinks So
    Business
    Motley Fool

    Down 28% In 3 Months, Will Facebook Stock Ever Recover? 1 Analyst Thinks So

    Decelerating revenue growth, shrinking margins, and surging expenses: Facebook's (NASDAQ: FB) Q2 earnings results were not for the faint of heart. Three months after that report lopped $120 billion off the social network's market cap, however, one analyst is stepping up to call Facebook stock a buy today. Facebook's last earnings report came out on July 25.