The Ar⁠t⁠ of ⁠t⁠he Trade War

By: The James Madison Institute / 2018



The Art of the Trade War

By Patrick Martin

Since 1975, The United States has had the highest trade deficit in the world. In 2017, the amount of the deficit was $566 billion.[1] This means that the U.S. imports more goods than it exports. In some cases, the U.S. no longer produces certain goods such as consumer electronics.[2] For example, out of the $375,576 billion trade deficit with China , $70 billion is from shipments of cellphones.[3] The U.S. could make 100% of all the iPhones it needs, however it is more efficient if the components are made in other parts of the world that are able to manufacture them faster and cheaper: i.e. Processor from Taiwan, screen from Japan, gyroscope from Switzerland, camera from the U.S., and assembly of the whole product in China.[4] This results in a cheaper iPhone for you to buy.

Is it accurate to say that importing $800 billion worth of goods per year means “losing” $800 billion? Not any more than saying that subscribing to Netflix means “losing” $100 per year. Those goods were imported because the people who bought them decided that it would be better to import them than to make them themselves. This is like you finding it is a good deal to pay $100 a year for Netflix, rather than writing, editing, and directing your own movies and TV shows, and then watching them.Some believe trade deficits, such as the one that results from the flow of iPhones from China to the U.S., are bad. President Donald Trump has been a longtime avid opponent of the deficit. While announcing the tariff trade plan, Trump remarked “We lose $800 billion a year on trade, every year”.[5] This $800 billion figure represents how much the U.S. imported in 2017. It leaves out a large part of America’s economy, because it does not include how much in services America exported. For example, if a Chinese family uses an American airline to visit Disney World in Orlando, that would be considered an export of a service. America produces a surplus of services, and thus exports them. In 2017, the U.S. exported $242.2 billion worth of services, bringing the overall deficit to $566 billion.

President Trump often frames the trade deficit as a loss. He has tweeted, “Trade deficits hurt the economy very badly.”[6] He has taken aim at China, during a March 5 speech citing a $500 billion deficit, though the U.S. trade deficit with China has never passed $337 billion.[7] In response to this, Trump enacted protectionist measures to try to “bring back steel manufacturing to the U.S.”, with a 25% global tariff on steel. The goal was to hurt China, which only accounts for 2% of steel the U.S. imported in 2017 – tenth place for largest exporter to the U.S. In first place is longtime ally Canada, which sends 90% of its exported steel to the U.S. Offending NAFTA allies and the E.U. has everyone worried about a trade war – except the President.

In response to growing fears of a trade war, President Trump said in a tweet, “Trade wars are good, and easy to win.” This is not true, and evidence can be found even in introductory economics textbooks. The textbook International Economics: Theory and Policy is written by Nobel Prize winning economist Paul Krugman and is used in Ivy League colleges’ introductory business and economics courses. The textbook states: “… if countries cooperate and set zero tariffs against each other, then both countries are likely to benefit relative to the case when both countries attempt to secure short-term advantages by setting optimal tariffs.”

The President’s perspective of trade deficits being “unfair” is also addressed in the textbook. Krugman writes, “It is often incorrectly interpreted that a trade deficit implies that unfair trade is taking place. After all, the logic goes, when imports exceed exports, foreigners are not buying as many of our goods as we are buying of theirs. That’s unequal exchange and that’s unfair.”

Douglas Irwin, professor of Economics at Dartmouth College, wrote a text required for reading by Wharton’s Nations, Politics and Markets course. In another text, he writes plain and simple: “Trade wars produce no winners.”[8]

Patrick Martin is a student at Florida State University studying Economics and Political Science.