Sadly, President Trump’s instincts regarding trade wherein he believes negative trade balances to be a consequence of other countries’ ripping off the United States is reinforced by his chief trade advisor, Peter Navarro. Economists have long known this view to be specious, and acting on it in policy will only end up making Americans economically worse off. In an op-ed in today’s Wall Street Journal, Mr. Navarro rejects over 200 years of economic learning. In response, I have submitted the following to the Journal as a Letter to the Editor. (See also my earlier Posts on trade economics here and here.)

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As a former economics professor, I am disheartened to see one of Mr. Trump’s chief advisors, Peter Navarro, reject over 200 years of economic learning by speciously using GDP accounting to contend that current account imbalances should be a significant policy concern.  (“Why the White House Worries about Trade Deficits,” 3/6/2017)  Mr. Navarro contends that boosting net exports over imports boosts growth and, implicitly, the country’s economic well-being.  As many economists acknowledge, however, GDP is a poor proxy of economic well-being and, in turn, GDP growth is a poor measure of changes in a country’s wealth.  Indeed, by Mr. Navarro’s reasoning, we can increase wealth simply by enlarging government expenditures financed by fiscal deficits or money printing.

Starting with the indisputable premise that the ultimate end of economic activity is consumption, Adam Smith taught in The Wealth of Nations (1776) that a nation’s well-being is determined by the amount of final goods available to its people.  Exports thus are a cost to a nation (using up its scarce resources for foreigners’ consumption benefit) while imports a benefit (consuming out of others’ scarce resources).  Exports are the cost of paying for imports. 

A nation benefits from trade whenever it can obtain goods from abroad cheaper than it can produce those goods at home.  Obtaining goods cheaper from foreign sellers not only increases the available consumption pie (and thus a nation’s wealth), but it also frees up resources that can be deployed to expand wealth even further.  What’s more, it matters not whether the goods are cheaper because of comparative resource advantage or because other countries inflict harm on themselves by subsidizing their exports. 

Economic history has confirmed Smiths’ wisdom many times over.  One would hope that this wisdom is not entirely lost on our policy makers. 

Theodore A. Gebhard