A Message For Trump On Trade: Get Real

President Donald Trump delivers remarks on trade between the United States, Canada, and Mexico, in the Rose Garden of the White House, Monday, Oct. 1, 2018, in Washington. (AP Photo/Evan Vucci) ASSOCIATED PRESS

Two back-to-back, stunning economic headlines arrived in less than twenty-four hours. The first appeared in the Wall Street Journal yesterday afternoon: “U.S. Budget Gap Widened 77% in First Four Months of Fiscal Year.” Following on the heels of that shocker, Bloomberg this morning ran this headline: “U.S. Trade Gap Surged to $621 Billion in 2018, 10-year High.”

What President Trump and his team of protectionists must learn is that these two headlines are interconnected—joined at the hip. If the government runs a big fiscal deficit, the U.S. will run a big trade deficit. Alas, this fact has never crossed President Trump’s mind.

President Trump and most in his administration believe that the U.S. trade deficit is a “bad” thing caused by foreigners who engage in unfair trade practices. For them, the solution is the U.S. imposed tariffs and other anti-trade measures. Our trade deficit is made in the good, old U.S.A., not by foreigners engaging in “unfair” trade practices. Tariffs will not change the overall U.S. trade balance.

How could this be? In economics, identities play an important role. These identities are obtained by equating two different breakdowns of a single aggregate. In national income accounting, the following identity can be derived. It is the key to understanding the trade deficit.

  • (Imports - Exports) ≡ (Investment - Savings) + (Government Spending - Taxes)

Given this identity, which must hold, the trade deficit is equal to the excess of private sector investment minus savings, plus government spending minus tax revenue. So, the counterpart of the trade deficit is the sum of the private sector deficit and the government deficit (federal + state and local). The U.S. trade deficit, therefore, is just the mirror image of what is happening in the U.S. domestic economy. If expenditures in the U.S. exceed the incomes produced, which they do, the excess expenditures will be met by an excess of imports over exports (read: a trade deficit).

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Kurt Benson 1 month ago Member's comment

An honest, sobering report.