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Trump Is Right That the Trade Deficits Have Crippled the U.S. Economy
Raymond Richman, 12/20/2016

In its issue of December 19, Barron’s magazine published an article entitled “Tackling Trump’s Trade Plan” written by a member of its staff, Gene Epstein, who holds an M.A. in Economics from the New School. Judging from his article, Epstein appears to know little about the theory of international trade.  He begins by writing how awful the Smoot-Hawley Tariff Act of 1930 was. He writes that “U.S foreign trade plunged by 40%, which helped drag the economy into the Great Depression.” That is nonsense. Net Exports, which is the net effect of foreign trade on Gross Domestic Product, was 0.3 billion in 1930, 0 billion in 1931 and 1932 and did not become negative until Pres. Roosevelt’s New Deal policies made it -0.2 and -0.3 in 1935 and 1936. The Snoot-Hawley tariff, contrary to widespread belief by economists and journalists, not only had no effect on the Great Depression which began three years before the tariffs became effective. It has been used falsely to attack anyone who is for balanced trade and opposes free trade. Of course, trade does not need to be balanced with every nation but over time needs to balanced against the rest of the world. A look at the Bureau of Economic Analysis’ Gross Domestic Product accounts shows that the U.S. has been suffering chronic trade deficits for decades, which has converted the U.S. from the world’s leading creditor to the world’s leading debtor since about 1985, halved the economic growth rate,  and caused the loss of millions of good-paying U.S. manufacturing jobs. Our principal trading partners pursued a trade surplus policy to promote their economic growth at our expense.

When trade is balanced, all trading partners gain from trade, obtaining goods they value more by trading for goods they value less. When trade is unbalanced the trade surplus country trades some of its goods for an IOU of the other. Japan used those IOU’s to buy productive assets already in existence in the U.S., the Rockefeller Center. China and others have been buying U.S. businesses. Buying U.S. real estate and existing businesses does not create demand for U.S. labor. The U.S. by running chronic trade deficits with the rest of the world is not exchanging  goods it values less for goods it values more. It is increasing employment abroad while decreasing employment at home.

Epstein states another falsehood namely that “the central purpose of any market economy is to serve consumers’ needs.” Where did he ever get that idea? The central purpose of any economy is to increase the welfare of its population. It does this by increasing the productivity of its working population, so that they may enjoy a rising standard of living. Balanced trade contributes to a rising standard of living; trade deficits do not.

Free trade is an appropriate policy when all the trading partners have the same currency, labor and capital are freely mobile, and none impose barriers to imports or subsidize exports. The U.S. Constitution imposes those conditions on the States. Those conditions do not exist between the U.S. and its trading partners.

Barron’s, the Wall Street Journal, and every other business publication with the possible exception of Forbes, conservative think tanks like Heritage and all others, favor free trade mindlessly, unaware that free trade is an ideal and appropriate only under the conditions mentioned above that the U.S. Constitutions requires of the States. The adage, “When ignorance is bliss, 'tis folly to be wise” does not apply to international trade.