Editor’s Note: Today’s Daily is brought to you by PBRG friend and distinguished economist, Professor Mark J. Perry. Professor Perry is a frequent contributor to The Wall Street Journal, The Washington Post, and Investor’s Business Daily. His blog on free market economics, Carpe Diem, is required reading around Palm Beach HQ.
Today, Professor Perry explains where presidential candidate Donald Trump fails in his understanding of international trade…
From Professor Mark J. Perry at Carpe Diem: When it comes to international trade, Donald Trump flunks basic Economics 101.
His views on trade aren’t just misguided, they’re the exact opposite of sound economic principles.
Here’s a sample of The Donald’s economic boneheadedness on international trade. It’s from an interview with Linda Stasi of the New York Daily News on August 25 (emphasis added):
Donald Trump tells me we’re getting hosed by the Chinese—and that we’ve done it with our eyes wide shut. On the phone, I asked the Republican way-out-front-runner about China, whose tanking economy caused a near-disaster on Wall Street on Monday and whose economic hold on the U.S.—and the world—will continue to cause international markets to roller-coaster.
“What China has done to America?” he raged. “The money and the jobs they’ve taken from us? It is the greatest single theft in the history of the United States.” In other words, China is to the United States as Bernie Madoff is to investors. “And Japan is almost as bad,” he stormed. “Japan sells us millions of cars—and we sell them wheat!
“I’ve been saying for years that China would take us down. Why? Because our leaders are stupid, and China’s leaders are smart. They sell to us—no taxes, no nothing. We sell them 10% of what they sell us. Ninety percent to 10%! It’s crazy. Our trade deficit with China is like having a business that continues to lose money every single year. Who would do business like that?”
So, in The Donald’s economic la-la land, his apparent economic strategy would be to minimize U.S. imports from countries like China and Japan, maximize U.S. exports to the rest of the world, and move the U.S. from what he thinks is an unfavorable trade deficit to what he considers a favorable trade surplus.
Like I said above, that type of economic “thinking” isn’t just misguided, it’s upside-down and backward.
At the country level—just like at your household level—to maximize the gains from trade, the goal should be to maximize the volume of goods coming into our country (your household) and minimize the volume of goods leaving our country (your household). (I.e., Maximize imports and minimize exports!)
To help straighten out The Donald’s upside-down economic thinking about international trade, I hereby assign him to watch the video below, featuring Milton Friedman giving a lecture about international trade at Kansas State University in 1978.
In the video, Professor Friedman addresses Donald Trump’s economic boneheadedness by specifically discussing the perpetual, political obsession with increasing exports and reducing imports to achieve a more “favorable balance of trade.”
Here’s a quote from Friedman’s lecture demonstrating the timeless nature of his economic wisdom.
It’s as relevant today for addressing Donald Trump’s misguided mercantilism as it was in 1978. (The quote is slightly revised and personalized for The Donald.):
In the international trade area, the political rhetoric is almost always about how we must export, and what’s really good for America is an industry that produces exports.
And if we buy from abroad and import lots of goods from countries like China, Japan, and Mexico, that’s supposed to be bad. We are getting “hosed,” in the words of Donald Trump.
But clearly, that’s backward and upside-down thinking. After all, the goods we send abroad to other countries we now can’t eat, can’t wear, and can’t use for our homes and households. Simply put, the goods and services we export and send abroad are goods and services not available to us.
On the other hand, the goods and services we import from China, Japan, and Mexico provide Americans with TV sets we can watch, automobiles we can drive, food we can eat, and all sorts of nice things for us to use.
Here are two important points about trade Mr. Trump needs to understand: 1) the economic gain to Americans from foreign trade is what we import from countries like China, Japan, and Mexico, and 2) what we export is the cost of getting those imports. And the proper objective for a nation, as Adam Smith put it, is to arrange things so we get as large a volume of imports as possible from China, Japan, and Mexico for as small a volume of our exports as possible.
This carries over to the terminology we hear Mr. Trump and politicians use. When people talk about a favorable balance of trade, what is that term taken to mean? It’s taken to mean that we export more than we import.
But from the point of view of our economic well-being and our standard of living, that’s an unfavorable balance. That means we’re sending out more goods and getting fewer in return. Each of you in your private household would know better than that. You don’t regard it as a favorable balance when you have to send out more goods to get less coming in. It’s favorable when you can get more by sending out less.
Here’s a simple formula summarizing Milton Friedman’s insights about international trade:
1. The stuff we import as a country
2. The stuff we export to the rest of the world
3. Our standard of living.
Bottom Line: In economic terms, our standard of living is highest when we maximize imports and minimize exports, which is exactly the opposite of Donald Trump’s and many politicians’ misinformed thinking.
If anything, it’s the U.S. that’s “hosed” China, Japan, and Mexico over the years, and it’s the U.S. that’s engaged in the international “theft” of billions of dollars of imported goods that’ve been “stolen” from those countries.
After all, when you consider who ends up with the most “stuff” from international trade, the U.S. is the winner—we’ve acquired more “stuff” from them than the volume of “stuff” we’ve sent them.
That’s what a supposed “unfavorable” trade balance really is—we get more of their stuff than they get of ours, and then we complain that it’s “unfavorable.”
In Donald Trump’s upside-down world, he’d rather we move from our current “stuff surplus” we enjoy with the rest of the world to a “stuff deficit” with our trade partners.
To paraphrase The Donald, our trade deficit (“stuff surplus”) with China and the rest of the world is like having a business that acquires more “stuff” every single year than it has to give up.
Who wouldn’t want to do business like that?
For the best explanation of the benefits of positive trade “imbalances,” watch the following video from Milton Freidman himself:
Reeves’ Note: Professor Perry’s Carpe Diem blog is one of the best sources of free market economic insight anywhere on the Web. If you want to become a better investor, learn the economics that underpin our investment principles. Carpe Diem is a great place to start…