Some erroneous ideas die hard. Diseases aren’t caused by “miasmas.” Nobody believes, as the Greeks did, that the west wind impregnates mares. Yet mercantilism, the erroneous notion that exports are inherently good and imports bad, is not only common in the general populace but has a grip on our president and commerce secretary.
This has the potential for disaster.
I know by experience that mercantilism rings true for many. President Trump takes it to a higher level. He and Commerce Secretary Wilbur Ross believe that bilateral trade balances — flows between two counties taken in isolation — are an important indicator. For them, a trade “deficit” with another country — meaning the value of our imports from that country is greater than that of our exports to it — indicates that we are suffering economic harm and that our trading partner in surplus is reaping unjust benefits.
Trump successively termed the Chinese, Canadians, Mexicans and now the Germans as being “bad, very bad” because the value of items from sellers in those countries to U.S. buyers exceed flows in the other direction. He believes that when such an ‘imbalance” occurs, it results from conscious, hostile actions by the other nation to harm us.
That is utter nonsense. The course Trump is setting will harm us greatly.
Consider first the flows between states in our own nation. What if people in my home state of Minnesota spend more for orange juice from Florida than we get selling heart valves and flour to Florida? Is Florida cheating us? Taking jobs away from us? Being “very bad” to us? Is the imbalance due to something Florida’s government does that Minnesota’s fails to counter?
What about New York? It imports food and manufactured goods from other states. It no longer manufactures a lot, so it doesn’t sell nearly as much merchandise to other states. Is this a sign that New York is being damaged? Are other states being bad to it?
What about Wyoming? It exports millions of tons of coal plus cattle and wheat to other states, all worth more total value than its small population imports. If a Texas power plant burns Montana coal, are Texans getting screwed? Should all states that buy more from Wyoming than they sell to it get together and force those cowboys to clean up their act?
Of course not. True, states are not nations, not least because they don’t have their own currencies. But the analogy is more valid than you might think.
Trade between states is multilateral. Wyoming coal generates electricity in eastern Missouri that flows into a grid serving Tennessee so power from a Duke Energy plant becomes surplus and flows to Florida. Orange juice from Florida goes to workers at a car factory in South Carolina that sells a sedan to an engineer in Minnesota whose employer sells a heart valve put into the chest of a Wyoming rancher.
The United States buys much clothing from China. We have a big “deficit” with China, but these days China gets most spinning, weaving and sewing done in Bangladesh or Vietnam. It has deficits with those countries.
Yet these poor countries buy medical devices, food and many other things from the U.S. We have “surpluses” with them. Are we out to damage the Bangladesh and Vietnamese economies, to hurt their workers or consumers? Would they benefit by closing their borders to food from elsewhere so that their farmers could get higher prices from hungry urbanites? Should they avoid buying U.S. heart valves or jetliners to end our bad treatment of them?
Again, of course not. No economic indicator is more meaningless than a tabulation of trade between two individual countries disregarding all other trade and financial flows.
Trump targeted Germany on May 30. “We have a MASSIVE trade deficit with Germany, plus they pay FAR LESS than they should on NATO & military,” he tweeted. “Very bad for U.S. This will change.”
German tourists spend much more here than U.S. tourists spend in Germany. Should German Chancellor Angela Merkel shake a verbal fist, warning Trump that economic aggression of Disney World, Broadway and Old Faithful must stop?
How is the U.S. government ramming our tourism down ravaged throats of German consumers? How did we get Australia over a barrel so that they buy twice from us what we buy from them? Or the United Arab Emirates, which we screw into buying seven times more in our exports than we buy from them?
In market economies, countries don’t sell to each other. Companies do. The U.S. government does not sell the Kingdom of the Netherlands soybeans. Cargill buys soybeans from U.S. farmers and sells them to a Dutch feed company, which prepares rations for a Dutch dairy. Would the Netherlands be better off if the European Union imposed a higher tariff on soybeans so its own oilseed growers could improve profits, buy tractors and hire workers? After all, they now buy 2.5 times as much from us as we from them.
The answer remains no.
St. Paul economist and writer Edward Lotterman can be reached at email@example.com.