Trumpian Trade Policy Is At War With Itself

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Here’s a letter to someone who disagrees with my recent letter in the Financial Times.

Mr. Q__:

Thanks for your e-mail.

You write that you support Donald Trump’s protectionist trade policies because “they will cure our trade deficit through moving investment to the US and stop job offshoring.”

With respect, you – like Mr. Trump – misunderstand how international trade and investment work. Every dollar that foreigners invest in the U.S. is a dollar not spent on U.S. exports. Therefore, every dollar that foreigners invest in the U.S. makes the U.S. trade deficit one dollar larger, not smaller, than it would otherwise be.

Moreover, if you really want to reduce the U.S. trade deficit, you should encourage more American investment abroad because such investment shrinks, rather than swells, the U.S. trade deficit. After all, every (say) euro or peso or dollar that Americans invest abroad is a euro or peso or dollar that Americans don’t spend on imports.

The bottom line is that protectionist policies that artificially increase foreign and American investment in America by artificially discouraging investment abroad cause U.S. trade deficits to be larger, rather than smaller, than they would otherwise be.

Now I heartily celebrate high and rising U.S. trade deficits that result from market forces. These ‘deficits’ are nothing that need to be ‘cured.’ But when the U.S. government engineers an increase in U.S. trade deficits by artificially discouraging Americans from investing abroad – and by artificially encouraging foreigners to invest in America – my celebration turns into condemnation. Such engineering obstructs the access of American entrepreneurs, firms, and investors to the most lucrative global locations for uses of their ideas and resources, as well as directs workers and capital on our shores into employments less productive than would arise absent such protectionist meddling.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

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