President Trump gets Foreign Trade Wrong!

I rewrote the last article published in the Albuquerque Journal and submitted it to the Durham News & Observer. It didn't fly.

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In fighting a war, generals on the battlefield know that a frontal attack is not always the best tactic. A flank attack is often a better move. And, so it is with foreign trade.

President Trump sees trade deficits, import expenses in excess of export income, as a bad deal and surpluses as a good one. Where we have trade deficits the frontal attack is the president’s tactic of choice. He plans to impose tariffs on some imports, which makes those goods more expensive. That’s not a win! Let’s take a closer look. There’s a better option.

When we import we increase our standard of living by purchasing something we want after considering price, quality, and availability. The president thinks we are not paying enough for some things. He wants us to pay more or do without those goods thus lowering our standard of living. 

This applies to the president’s most recent targets, lumber from Canada, cars from Germany, steel from Canada, Brazil, and North Korea; and aluminum from Canada and Russia. President Trump now invokes national security to rationalize tariffs to benefit workers in the metal industries. He could achieve his nominal objective by requiring the military to source its needs domestically while allowing the rest of us to buy at the lowest prices.

Other countries like to export to us so they can get US dollars, which are the widely favored foreign exchange currency. Exporters give us real goods in exchange for our depreciating dollars. Who is the winner in that exchange? In real economic terms of trade, the winner is the importer, who gets real stuff for mere paper or computer digits. The exporter bears the real cost as its productive labor is serving a foreign economy.

In real terms of real trade, our trade deficits make us winners not losers. So, what is the down side of being a winner? When we spend into a foreign economy rather than our own the result is higher unemployment. 

The dilemma is this. We must reduce our standard of living by limiting imports to maintain employment or suffer increased unemployment to enjoy a higher living standard. 

The frontal attack favored by President Trump is to impose tariffs to the consternation of trading partners, who may counter with reprisals. The flank attack is to learn how to deal with unemployment in general. We can do that, although we haven’t since the New Deal in the 1940s.

A federal Job Guarantee (JG) would provide work for anyone willing and able to work. It would be federally funded and locally administered to serve the public. This would provide a pool of employed workers that businesses could draw upon when they decide to hire. 

Workers would earn a minimum wage with benefits. The program would set a national minimum wage and maximize employment. Unlike the much ballyhooed Basic Income Guarantee (BIG), the JG would be countercyclical to inevitable business cycles. That is, it would increase when business hiring is weak and decrease when business hiring increases. 

The cost of the JG would be less than one might think, and it would be superior to the BIG. The work done would add to GDP, while an idle worker adds nothing. And, it would reduce the costs of unemployment benefits while increasing tax revenues. There is considerable literature on the subject generated by its proponents. The JG would help to maintain consumption demand and profits for business.

When we manage our unemployment by employing all able workers, including immigrants, we can enjoy the benefits of imports and increase our GDP. The end result is a better standard of living for all our inhabitants. That’s making America great!