Copyright: Public Domain / Used With Permission

We have this statement from Donald Trump about trade:

This is wrong, entirely so, wrong to the level of being both drivel and harmful drivel.

I should note here that I didn’t, because as a foreigner I can’t, support The Donald at the last election. But I didn’t support Hillary even more. So this is more about really, actually, insisting that Trump is wrong on trade issues rather than just the more general he’s wrong about everything common in the US press.

As I put it elsewhere some time ago, and as Jay Caruso says is a pretty good explainer, here’s why:

Trump Is Simply Wrong About The Trade Deficit Slowing US GDP Growth

President Donald Trump has been at the Twitter keyboard again, insisting that slow GDP growth in 2016–it was only 1.6%–was caused at least in part by the trade deficit. This is simply wrong, it’s a misunderstanding of the basic economics at play here. But then several advisers, Dan DiMicco for example, share this mistaken belief. The mistake is in not grasping the GDP equation.

Which is a pity, as it’s usually explained on the next page of the textbook, right after it’s first laid out. But here’s Donald:

Donald J. Trump

@realDonaldTrump

The U.S. recorded its slowest economic growth in five years (2016). GDP up only 1.6%. Trade deficits hurt the economy very badly.

Dan DiMicco also believes this:

Dan DiMicco, the former Nucor Steel chief executive who led Mr Trump’s trade transition team, told the Financial Times the new economic numbers bolstered the president’s economic case for a harder line in international trade policy.

“It’s another example in a long line of 20 years of examples of where the trade deficit reduces growth,” he said. “If you look at just what the deficit did this quarter, imagine what it has done all those years.”

Peter Navarro, sadly, shares this mistake:

This is the basis on which Navarro argues that having a trade deficit — buying more goods than you’re selling to your trading partners — hurts growth and that the best way to grow faster is by closing this deficit. That is to say, selling more goods than you buy.

It’s just an incorrect belief.

Economists have noted the correlation between growth and trade deficits, but many have said faster economic growth can lead to even higher trade deficits, as a roaring U.S. economy tends to demand more inputs from abroad.

Well, we had a huge trade surplus during the Great Depression. And as Politifact points out:

If anything, pairing the two charts shows that two of the years with a relatively small trade deficit — 2001 and 2009 — were two of the three weakest years for GDP growth during that time span.

What Trump, DiMicco and Navarro are getting wrong is this, the GDP equation.

Y = C+I+G+(X-M)

GDP is consumption plus investment plus government spending plus the trade balance – and minus it if there’s a trade deficit. So people look at this and think yep, if there’s a trade deficit than that makes Y, GDP, smaller!

But this is a mistake, an error. For, as the textbook immediately goes on to explain, what is it that we do with imports? Well, we either consume them, use them in investments or government buys them. So all imports are already in C and I and G. Meaning that if we don’t deduct them we’ll be double counting them. So, to avoid double counting we subtract them.

Trump and his advisers are simply wrong on this. The trade deficit doesn’t reduce the size of the economy. They’re getting it wrong simply because they’re not reading the second page of the explanation of the GDP equation.

Subscribe to The CT Mailer!

5
Leave a Reply

Please Login to comment
3 Comment threads
2 Thread replies
0 Followers
 
Most reacted comment
Hottest comment thread
4 Comment authors
afaresTim WorstalljghSpike Recent comment authors

This site uses Akismet to reduce spam. Learn how your comment data is processed.

  Subscribe  
newest oldest most voted
Notify of
Spike
Member

The dollars that flowed out of America when I bought my Hyundai did not weaken America (and ultimately must be reinvested in America). Foreign industry is not an act of war. South Korea has learned how to build cars, as Japan and Taiwan built televisions and computers. As an industry’s highly paid technical priesthood collapses and the gadget becomes a commodity understood by all, we sell off the industry and invent something new that will have higher profit margins. But Trump knows his audience. Assembly-line workers (and homeowners) want protection from less expensive alternatives, just as much as corporations do.… Read more »

jgh
Member
jgh

Would it be too much to teach the formula as:
Y = (Cd+Ci)+(Id+Ii)+(Gd+Gi)+X-Ci-Ii-Gi
(d=domestic, i=imported)
so it would be obvious why the subtraction is there. Argh, but maths! Much too hard!

afares
Guest
afares

I recall reading somewhere that imports should also be removed from exports in the long-form equation because some exports contain imported products. An example of that would be China’s export of iPhones which contain chips imported from South Korea. The cost of those chips would be removed from China’s exports.

In that case, the formula would be:

Y = (Cd+Ci)+(Id+Ii)+(Gd+Gi)+(X+Xi)-Ci-Ii-Gi-Xi

In other words, the “-M” factor in the GDP equation is removing imports from all four factors, i.e., C, I, G, and X.

afares
Guest
afares

“Meaning that if we don’t deduct them we’ll be double counting them. So, to avoid double counting we subtract them.” An error here. We remove imports not because we’d be double counting them, but rather that we’d be counting them in the first place. We don’t want imports there at all because they’re not a part of domestic production. Because they’re there already, we deduct them to remove them completely. The term “double counting” implies that we only wanted to count them once. Which is not the case here. As an investor, I have to remember to not make the… Read more »