Protection racket: Critics of free trade traffic in myths

Two: Trade deficits hurt the economy, and reducing the trade deficit would help the economy. Wilbur Ross, Trump’s nominee for commerce secretary, says it’s “Econ 101” that a trade deficit “weakens our economy.” Gross domestic product is calculated by adding together consumption, investment, government spending, and exports, and then subtracting imports; Ross reasons that increased imports therefore reduce GDP. Along with Peter Navarro, another Trump adviser, Ross has written that we can eliminate our $500 billion trade deficit and our economy will be $500 billion larger.

That’s a non sequitur. GDP, as the acronym suggests, tries to measure the value of what is produced here. So it has to exclude imports. Since some imports are counted as consumption and some as investment, the way to exclude them is to subtract them. Even as a matter of accounting, then, the argument is wrong.

Imports add to economic welfare; that’s why people buy them. Ross is assuming that imports are always substitutes for domestic production. On this assumption, levying tariffs on imported steel would not harm any American companies that use steel: They’d buy the same amount of steel at the same price from domestic producers, and be just as efficient as before. In the real world we should expect some combination of reduced purchases and increased prices, along with lower productivity.

Large trade deficits have often accompanied strong economic growth; so have rising trade deficits. The U.S. trade deficit grew through the 1990s, for example. Attempts to link trade deficits to the loss of manufacturing jobs are not persuasive, either. The European Union has a trade surplus, but it is losing those jobs too. (Higher productivity has been killing manufacturing jobs nearly everywhere.)

A more sophisticated argument against trade deficits holds that they weaken “aggregate demand,” as Keynesians put it, since money sent abroad is no longer circulating here, and since central banks may not always be able to counteract this effect by running a more expansionary monetary policy. Whatever the merits of that theoretical argument, though, it cannot apply today. The Fed has been tightening monetary policy: It raised interest rates last year and this year, and says it expects to keep raising them. If it wants a looser policy, it can cut them instead.