Trump's Tariffs Show He's "Clueless About Trade"

What does Trump know about tariffs and trade deficits? Steve Hanke of the Johns Hopkins University provides the answer.

This is a guest post by professor Steve Hanke at the Johns Hopkins University. Hanke is also a Senior Fellow at the Cato Institute.

I strongly agree with Hanke and asked permission to republish this article.

Trump's Tariffs Are A Reminder He's Clueless About Trade

By Steve Hanke

President Trump and his trade team remain clueless about the economics of trade. Their recent imposition of tariffs on the imports of Chinese solar panels and South Korean washing machines is but the latest evidence of a wrongheaded and dangerous U.S. trade policy. Wrongheaded because it is based on incorrect economic analysis. Dangerous because it will inevitably result in a trade war in which there are no winners.

Let’s turn to the president’s trade team and its view of trade. The key players are: Wilbur Ross, U.S. Secretary of Commerce; Professor Peter Navarro, Director of the White House National Trade Council; and Washington trade lawyer Robert Lighthizer, U.S. Trade Representative.

To a man, the members of Trump’s trade team, and the president himself, all embrace the notion that the U.S. trade deficit, something the U.S. has registered every year since 1976, is a “bad” thing, something that should be dramatically reduced (or eliminated) if America is to be First. They also believe that the culprits for this “bad” state of affairs are unfair trade deals and unfair trade practices employed by foreign countries. Their elixir to eliminate the trade deficit is a strong dose of tariffs and other anti-trade policies imposed on foreign exports.

Now here is where the simple analytics of the trade deficit can be used to prove the cluelessness of the Trump trade team on “trade,” of all things, and the utter futility of its policy prescriptions having any impact on America’s aggregate trade deficit. In economics, identities play an important role. These identities are obtained by equating two different breakdowns of a single aggregate. Identities are interesting, and usually important, by definition. In national income accounting, the following identity can be derived. Indeed, it is the key to understanding the trade deficit.

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

Given this identify, which must hold, the trade deficit is equal to the excess of private sector investment over savings, plus the excess of government spending over 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 in the U.S., which they do, the excess expenditures will be met by an excess of imports over exports (read: a trade deficit).

The table below shows that U.S. data support the important trade identity. The cumulative trade deficit the U.S. has racked up since 1975 is about $11.154 trillion, and the total investment minus savings deficit is about $10.435 trillion.

U.S. trade deficits are not caused by so-called unfair trade practices. They are made in the good old U.S.A.

President Trump can bully countries he identifies as unfair traders, he can impose all the restrictions on trading partners that his heart desires, but it won’t change the trade balance. It will only alter the composition of those exporting to the U.S. And by affecting this composition, the president’s interventions will hurt the U.S. consumer.

For someone who is so obsessed by the size of the trade deficit, it is astounding that Trump’s advisers failed to inform him that his fiscal policy of expanding the government deficit will, as night follows day (remember the trade identity), balloon the U.S. trade deficit.

Authored by Steve H. Hanke of the Johns Hopkins University. Follow him on Twitter @Steve_Hanke.

Mish Comments

Once again, the roots of this problem date back to August 15, 1971.

That is when Nixon closed the gold window, ending foreign redemption of dollars for gold.

Mike "Mish" Shedlock


All a tariff on solar panels will accomplish is, it will intensify the efficiencies of foreign manufacturers and cushion the inefficiencies of domestic producers, until the latter go out of business. A tariff being nothing more than a reverse subsidy, as it were.

Now, all said, I'm waiting for the day the Chinese government decides to subsidize gold sales to foreigners. But, alas, the US Gumnut would likely put a tariff on it ;-)

Lots of good points today. In terms of “free trade”, I agree with Mish that “free” is ideal. However, I also realize that in the world today, the road to free trade begins with trade agreements. Perhaps over time these agreements will reach Mish’s goal of a free trade agreement written on a napkin. In the meantime we can do three things; move further away from free trade, maintain the status quo,or mover closer toward free trade. Trump seems to be moving us further away. He uses the argument that all previous trade deals were unfair to the US, and he wants deals that put America first. This appeals to many Americans, and helps Trump politically, but it is completely wrong. The only reason that any country signs a trade agreement is because it a net benefit to that country. Otherwise they wouldn’t sign it. So all trade agreements are signed because it benefits both sides. Trump is trying to convince people that this isn’t the case by using words like “fair” and “reciprocal”. He implies that only he is capable of getting good trade deals for America. This is hogwash, and more likely to end up restricting trade rather than improving it. If he pulls out of NAFTA, as he keeps threatening, many Americans will lose a lot.

Not to give too much credit to Trump but what if Trump wants to put the breaks on the debt economy but can’t do so directly since he’d never get the votes to stop spending. Instead he undermines the trade deficit and blusters about fair trade. Trump makes foreigners the cause even while he is truly the cause through tariffs.

Mr. Hanke reminds me of those global warm-mongering alarmists -- take a little bit of theory, and blow up its significance beyond all reason. And economy is a complex entity -- where in Hanke's little equation do we find the term for the impact of over-regulation, or the impact of innovation? We can all agree that TRUE free trade would be a good thing. But almost all international trade is managed in some form -- often in ways that are hard to control. For example, the social pressure in Japan against buying a foreign-made automobile. And imports do more than benefit consumers through sometimes lower prices, it impacts the broader economy through the resulting export of jobs which in turn leads to very expensive social problems.

I hesitate to disagree with our host -- Mish has great insights and pungent comments on many issues. But the trade deficit is not a simple consequence of going off the Gold Standard. Mish's graph shows the US dropping off the Gold Standard in 1971, and the trade deficit ballooning in the mid-1990s -- a quarter of a century later!!! Over that same time period, the Government Regulatory Complex exploded, starting with the Environmental Protection Agency. That made it much more expensive to manufacture in the US, and businesses moved factories overseas. It seems that over-regulation is a much more significant cause of the trade deficit than the departure from the Gold Standard.

It's not solely coming off the gold standard, but because Chinese and Petro dollar states do not have freely floating currencies.

Countries that run an overall trade surplus could let their currencies rise until their trade was balanced. The Asian countries don't do that. They invest the money from their trade surplus in the US, often by buying US treasuries, in order to keep their currencies low relative to the dollar and to maintain their trade surplus. This is not the US's doing. Granted, we could balance our budget and not have new treasuries to sell, but with a one-person one-vote democracy fiscal responsibility is not going to happen.


Lazy Americans get cheap products from China, where the hours are long and the benefits meager, and when those jobs come home, and when fat ass America has to go back to work for those wages they will throw Donald Trump under the bus.

Mish's point with regard to the gold standard is that with a gold standard in place, you can't run a trade deficit for a long term or your lose all your gold. And, in normal times, that was true, however, is it inherently true? In normal times you can't run a trade deficit in the absence of a gold standard, either, or your currency falls when the foreign countries repatriate the profits. Neither situation accounts for the question of what happens if the foreign country with the trade surplus is content to leave their profits in the US. Even with a gold standard, China could leave their profits in the US, buying bonds, stocks, companies, and real estate. If they don't try to take the profits home, they don't take all the gold, and the trade deficits can continue.

I have to wonder, has anyone ever read the Art of the Deal? It becomes painfully obvious after 2 years of this now they have not.


All of what currently passes for “economics” is, at best, no more than “take a little bit of theory, and blow up its significance beyond all reason.” And that’s the few times anyone bothers deriving their random hankerings from anything resembling sound theory to begin with.

It’s not Hanke’s argument that attempts making mountains out irrelevancies. But rather the notion of a “trade deficit” in the first place. “Trade deficit” means absolutely nothing whatsoever. It doesn’t even have the kind of specious pseudo definition Hanke refers to, absent an overlay of completely arbitrary national boundaries being substituted for the constantly evolving, dynamic boundaries of economic relevance. After all, it’s not as if the “trade balance” between Laredo, TX and Nuevo Laredo, MX is somehow more economically important than the one between either of those two and San Antonio, TX up the road. Ditto for the “trade deficit” between Joe and Joe’s employer. It’s all just a pure, undiluted, simpletonian stack of folly turtles. And those turtles do go all the way down.

And further, if one is to grandstand and pontificate about such silliness’, at least one ought to know, and understand the implications of, their formal definitions. Which Hanke demonstrably does. In stark contrast to team hairdos-and-tweets.

Stuki -- it seems that you are saying economic theory is nonsense, but President Trump is worse for rejecting that nonsense? Oh well! But to the interesting point -- does Joe have a trade deficit with his employer? The answer is clearly -- NO. Joe trades his time & skills & effort to his employer. The employer trades some of the cash earned by the business to Joe. It is an exchange of unlike items of equal value to the parties doing the trading. The issue with unbalanced international trade is similar to that well-known economic topic -- the Tragedy of the Commons, where some benefit at a cost to the community as a whole. The individual who buys an import may be better off, but the community suffers because of the loss of jobs & productive capacity. The taxpayer-funded bureaucrats who negotiated trade deals for the US had the standard Leftie contempt for the American working man. (When was the last time you saw a Leftie in an American car?). President Trump does not share the sophisticates contempt for their fellow citizens. Understand that, and understand that President Trump is first & foremost a negotiator, and you can see through most of the nonsense coming from academia & the media.

trump is not intellectually curious. his view of the world is based how he thinks it should be without any need to examine those beliefs. that is what's scary. he's very comfortable acting on his beliefs and doesn't believe in simulations or speaking to economists or looking at models or history.


Trump isn’t rejecting the nonsense. Instead, he is specifically embracing it. The nonsense being “trade deficit” being some sort of economically relevant metric at all. Hanke at the very least bothers to understand how the silly little term is defined, and then referring to that definition in his arguments and reasonings around it.

Rather than just “feeling” that the word “deficit” somehow sounds baaad, and America has “deficit” so it must be “baaaad” and that must be someone elses fault, so “we” (always shorthand for the Party/Politburo/Government; never “we” as in anything including you AND me) must “do something” (which again is always shorthand for banning some Americans from doing something, and/or taking stuff from them without first asking their consent) the way Trump and Co. goes about it. Well indoctrinated, and not too bright, progressive drones playing to an audience of similar simpletons that they inevitably always are.

Correct - there is absolutely nothing "bad" about a trade deficit. Maybe it's the negative connotation of the term "deficit" that causes all the belly-aching. Anyway, these tariffs Trump imposed bestow privileges on tiny special interest groups to the detriment of every US consumer and numerous other economic actors.

The identity formula ("which must hold") completely ignores debt and currency creation. Imagine isolated Planet A with one country and therefore no trade. Somehow, investment exceeds savings while at the same time government spending exceeds taxes. How is this possible? The government issues debt for its own use and makes loan guarantees for investments. The central bank of Planet A buys the government debt and its commercial banks make investment loans. Voila.