Opportunity costs are not shared equally across the economy. Example scenario - all US shoe factories are closed and all shoes are imported from China. Beneficiaries are US shoe purchasers. Those negatively impacted are unemployed workers from the closed factories. So the "free trade" question is - does the aggregate savings from all US shoe purchasers exceed the lost wages from the fired workers? Maybe. Maybe not. But each fired worker is paying a much higher price for "free trade" than the cools kids saving on their pair of Allbirds.
To say, as you do, that this is only a concern in vital industries such as electronics is the equivalent of saying "Learn to code." My point is that opportunity costs associated with free trade extends beyond dollars and cents, to social, moral, psychological and structural costs. If entire towns are wiped out because free trade caused the largest employer, the local paper mill or local steel mill, to close, any incremental savings that resulted can not offset the damage and devastation from that scenario. Drive through Bridgeport, Ct or any town in western New York state to see what I'm talking about.
It's especially tragic when it's realized that the paper mill and steel mill were destroyed by foreign imports subsidized by foreign governments. It's predatory and it's the one area where our government should really help. There is also the loss of skill and knowledge when these industries disappear because of predatory competition. One of the problems the USA will have in the very near future is this loss of institutional knowledge -- finding people who actually know how to run the machines in the mill, organize the logistics, keep the power on. Sometimes youtube videos just aren't enough.
Lot of economics is needed to understand the entire situation; at least one bachelor’s degree worth.
There are many different aspects to every point you made, and you did a great job trying to explain the costs and benefits of each issue- Thanks.
When it comes to “intellectual property” we try to protect the inventor, creator, because it incentivizes people to be inventive and creative.
Without intellectual property rights we would get into a “steel the bacon” business model. Rather than spending money on Research and development, companies would pay for information about competitors, and keep their powder dry, waiting to pounce on any new product or technology.
The second rat would get the cheese, having not spent capital on research and development, they could avoid dead end efforts, and just do it right-
But intellectual property rights also have a huge negative to consumers. Patents on drugs allow big pharma to gouge us- and charge prices that are beyond the price that would afford them the opportunity to recoup their costs of research and development. They exploit governemnt to keep the patents in place- the longer the better for the company- what’s appropriate? 1,2,5 years? Who decides? Nancy Pelosi and her hedge fund husband Pauly P?-
Just this topic could be an entire Econ class- I know- I took it🤓
The bottom line is China erects all sorts of barriers, they manipulate their currency, prevent us from buying their assets with our strong dollars- Europe puts on tariffs to prevent competition- and given “economies of scale”, which is a huge aspect of all of this, that you can address in your next post, the US has a massive advantage. We have well developed capital markets, and can out produce any entity in Europe- that’s how we own WWII.
So there’s no way to remain pristine in the international trade war.
They “cheat” and steal and copy and manipulate, and we can’t allow other countries to continue.
So Trump has fought back- and it will have all sorts of impacts on everything from inflation to jobs. But I 100% agree with your statements about the “trade balance” it’s a ridiculous number and making it go from negative to positive doesn’t mean we have improved our economy, or made America greater -
Your post asserts that "unfettered free trade is generally a very good thing to have in our lives. It lifts all boats." I once shared such enthusiasm for free trade across all borders. But it has become obvious that ALL boats do not benefit from "unfettered" free trade--it creates winners and losers. Most consumers benefit, but not all producers. It is flawed economic reductionism and short-sighted to tell those whose industries suffer to "move somewhere else," "learn to code," etc. And that insight has been key to Donald Trump's political success.
Fair point. But, how about American's educational system? it sucks and so it is awfully hard to retrain workers. How about America's safety net. Might be too thick. People don't move to opportunity like they used to. They stay put. I think there are several other issues I would like to see resolved a bit better before I abandon free trade. But, your point is about the costs, and how we total up the costs. It's a good one to chew on and there are no good short term answers.
This is a big issue, I think. First, as noted above, the hollowing out of many small and mid-sized, formerly functioning (if not totally prosperous) towns has been horrific to watch over the past 40 or so years. It is destructive not just for the towns but for those families, and I think has led to many of our modern ills of drug use, loss of purpose, broken families and lack of connectedness. In the past, people's reference points were their physical neighbors. But now--and it is NOT just social media I'd posit, but the lack of actual neighbors--that prompts people to see their "community" as a digital one. We humans are relational beings and we need each other to keep ourselves healthy.
Loss of local industry also destroys appropriate pride in one's work. Who will teach the younger workers? Perhaps this explains the huge success of Mike Rowe's apprenticeship programs and scholarships for tradesmen (as well as the chance to make some $$, obviously).
If you have heard Salena Zito speak about her new books she frequently cites the importance of "place" and "rootedness" as part of what comprises values for many, including those who support Trump. I get her point, particularly as someone that has lived away from my family home and traveled widely.
I took a double major in Political Science and Econ at a very well regarded college, yet I can say that the treatment of "free trade" and its merits was quite shallow, honestly, one confined by equations primarily. At this point, and given the huge dangers we face with an out of control leftist/progressive agenda which doesn't stint at violence to obtain their desired outcomes, I don't see academic economics as muscular enough to address this issue.
Finally, on the world stage Trump is right that other countries have been not just dependent, but feckless, in their exploitation of the USA. ESPECIALLY when we have accumulated a lot of debt, which is a grave issue, and in part because of our generosity in foreign wars such as the "War on Terror" which yielded little of merit, and our domestic "War on Poverty", likewise unsuccessful.
Thanks for the article Jeff. Seems to me that debating this issue requires a very broad view that encompasses more than just economics.
Good points. That's what I meant by a "flawed economic reductionist" view: that people are merely economic units (a la Marxism) who can & should be ready & willing to be uprooted from homes and families and communities in pursuit of a new job. To be sure, people and families (and "peoples") do migrate over time, and always have, in search of better lives. But the causes are not just economic. People have always moved or stayed put due to a host of factors including economic, religious, romantic, medical/health, enjoyment, better terrain or weather, etc. A "better life" is not just more money.
Economic harm can be self-inflicted, such as featherbedding and cartelized labor or industry. A different education system should help folks adapt as needed.
But "unfettered" free trade with other countries with their self-serving subsidies, mandates, or national policies can do much harm by forcing hardship on people through no fault of their own.
All the talk around international trade ans economic policy is all the more amusing when you consider that EU countries have paid more for Russian natural gas than they have given in aid to Ukraine. I dont know if this is like robbing peter to pay paul, but its something maybe stupider. I largely agree with pretty much all you said here with one exception. Ive never heae Trump rail against free trade. What ive heard him rail against is unfair trade practices by other nations being use against us to undecut and even eliminate our domestic producers.
What's fair? I think that is subjective, and not objective. It sure seems unfair to me that the EU countries tariff the crap out of US wine and vice versa. But is it?
This is just not true: "Faust bargained his soul with Satan and lost." Faust got exactly the deal the devil promised and that Faust accepted; the problem was, Faust wanted to renege at the end of the bargain's term, but Satan made him keep his word. Satan is always scrupulously fair and trustworthy; he just never loses his bet. Well, except that one time when some random hillbilly in Georgia beat him at a fiddle contest.
"The author further cites, incorrectly, I might add, that it is a terrible thing for foreigners to own equity in US companies."
Would you agree that, by the same logic that says we should not be free-traders on items that are essential for national defense, we should extend that logic to the companies that make those items, even if they are here in the US?
Back when I was working for a living, this was a recurring issue: any company that did business with the Defense Department was subject to strict limitations on what was called in the jargon of the era "FOCI"..."Foreign Ownership, Control, or Influence."
If a foreign company wanted to take over or--as the broader nomenclature implies--get cozier with a US defense contractor than we might like, there was a protocol: in essence the company had to sever its defense-related operations and hide them behind--again, I don't make these terms up--a "Chinese Wall."
In other words, foreign ownership or investment, OK; foreign investment or ownership of a defense contractor, not OK.
So would you accept a carve-out on that basis?
I should note that in the one instance in which I was directly involved, the prospective buyer was a British company, at a time when Britain was our most trusted ally (you might be surprised at the number of times I saw documents with the classification marking "NOFORN EX UK" meaning "No viewing by foreigners, except the UK"). Point being, this was a universal rule, not just applicable to our current adversaries.
I don't think we would disagree. I would limit the amount of equity a foreign government, or foreign fund could have in a specified defense industry. The SEC already has rules on ownership percentages with regard to reporting-so this is not a foreign idea (forgive the pun).
Well done. The only quibble I have is that you lean too heavily on the economic side of things, and not heavily enough on the political. Trump is using tariffs as a political tool, and selling that use as an economic tool. Without selling the tariff income, it would be nearly impossible for him to sell it at all.
I respectfully disagree in your overall criticism because neither you or Spencer cover the overall dynamics involved which is understandable in a short essay format. I have followed Spencer for years and he has shown to rarely be dead wrong on this subject.
China's economy has grown at 10% for the last ten years with positive trade deficits. Our country's most prosperous times were the late 19th and earliest 20th century prior to the income tax using tariffs and assumed positive trade deficits.
At the macro level... Ever since we went off the gold standard in 1971 we have run trade deficits and every citizen in the United States has suffered greatly and @brateconomics has the data to prove it.
Jerome Powell is a failed lawyer who is dangerously in control of our money supply and is wrong all the time according to Peter Navarro - and Navarro has been shown to be correct in Trump 1. So was Spencer on tariffs as steel and aluminum prices decreased 23% from 2018 to 2021(along with other dynamics like cheap energy and a tightened money supply).
China had a smaller base to grow out of so 10% isn't crazy. I'd argue that we have very prosperous times coming, and today seems pretty prosperous depending on how you define it. I like Economist Russ Roberts way with standards of living-or in the words of Rush Limbaugh, "America has the wealthiest poor people in the world."
Yes sir. I respect you greatly and my style is very direct(mainly because I am at work), please don't take anything personally.
The dynamics I mentioned previously: "Global energy prices, domestic energy prices, currency evaluations and fluctuations, state/govt subsidies to manufacturers, labor negotiations and production profit offsets are only a few of the components."
I think there is more to the idea of "trade deficit" than you do. But I agree it is a misleading number.
I think most people's thinking would be improved greatly by thinking more in terms of the "balance sheet" than the "income statement" when it comes to international trade.
Running a trade defect certainly doesn't sound bad in it's more distilled form. You get to consume more than you produce. Who wouldn't be in favor of that? The thing that gets left out of discussions on international trade is that there are two ways to consume more than you produce and they are extremely different.
One way is to go sell off everything you have and/or go deep into debt. This is the method used by drug addicts. Sell everything you own. Then borrow everything you can. Works fine until it doesn't.
The other method is to "live off the interest". This is the method used by retirees. Works well, you just have to be careful not to deplete your capital.
The exact same principle applies to international trade. But, like above, the results are worlds apart. You talk about the debt, but almost like it is an unconnected problem. The debt is there BECAUSE of the deficit. THAT DEBT IS HOW WE ARE FINANCING the trade deficit.
If you are a retiree living off the interest, deficit between your earned income and your expenses isn't a bug, it's a feature. It doesn't need to be solved.
However, if you are deep in debt because you keep spending more than you earn, in that case, yes, the deficit is a problem and it is destroying you.
The author conflates the purchase of land and equity (private transactions) with countries purchasing US Treasuries....he is woefully incorrect. The Chinese aren't buying farmland next to US military institutions because of a trade surplus. A private seller of that land isn't doing it because of a trade deficit.
Yes, things are more complicated because aggregates are made of individuals. But the big picture is still simple. The fluid dynamics of water as it flows through a river are impossibly complicated but the fact that a river is flowing down the gradient of a watershed is simple.
Trade is always balanced or it doesn't happen. Something we libertarians praise about the free market all the time.
The US imports more "trade goods" than it exports. That's what the trade deficit measures. Why would China do this?
They do it because we offer them "assets" other than trade goods. These can be debt or equity. They could also be physical capital like land. They can be public or private assets.
But we have to offer them. We aren't offering them as many trade goods as they would need without them. That's what the trade deficit is showing.
As I said there are good and bad reasons to do it. Startups need capital and selling it is a great way for them to operate even though they are in the red right now in the short term. Old established companies consistently operating in the red and borrowing to cover operating expenses is another thing.
So it's not necessarily a bad thing. And as a nation we have individuals doing both. The aggregate number includes both the good type and the bad type.
Which does complicate things, since it is hard to know how much of it is the good type and how much is the bad type. The aggregate number does not distinguish. It also means people can cherry pick just the good or just the bad when making some argument, which is extremely frustrating.
It also means we sometimes tend to talk past each other since, during discussions, in the name of brevity, it all gets lumped together. I can see why that seems like I am conflating things but I promise I am not. It is just that aggregated measure aggregates. If anything is conflating anything, it is the definition of "trade deficit", which puts all things together in a single measure.
We need better statistics than the trade deficit. I suspect when a trade deficit with a particular country is less like a wave and more like a slope that indicates a problem.
To understand President Trump, I think we must take into account that he's one of the world's greatest salesmen. To be great at sales you need to understand your, your competitors' and your potential clients'strengths and weaknesses. Knowing his and their strengths is a strong suit of his, knowing their weaknesses is also a strong suit of his, though knowing his own weaknesses not so much. LOL
Nonetheless, he knows that sometimes it is imperative to exaggerate certain aspects of a potential policy to make it palatable to Congress, the media and everyone else, including his competitors, in such a way that shows that we, as the premier and largest consumer in the world, hold the majority of the cards and the winning hand, not the other guys. Just as we discussed back in April in tariff month, the tariffs get the news and have shock value but they're really more of a negotiating strategy than anything else to bring about fair trade policy and fight back against intellectual property theft, ridiculous import export policies that are grossly unbalanced, etc I can remember in the '80s when the monthly trade balance number was considered a significant economic release and today it's generally a nothingburger, although it's gained a little more impact than it had, say a decade ago.
I said it many times before and I will continue to say it:we need to bring a manufacturing base, a strong one, back to rural areas of the United States if we wish to remain the world number one. JD Vance's book, Hillbilly Elegy, was read by Trump and contributed to him being the choice for Vice President. His book has some both subtle and overt great points man about growing up in rural America. When you have a powerful great salesman with balls and brains in charge, who actually cares about people, that's the direction you take, and no, I do not work for the President's or Vice President's public relations firm. 🤣
If we take a look at the whole issue you brought up from a macro/30,000 ft view, what we're experiencing now is only one step in the process; it's not the panacea. Remember that what you wrote about attorneys, who are notoriously ineffective at managing other people's money and managing other people, but damn good at writing lengthy reports and generating billable hours, represent the number one profession of the majority of politicians prior to entering politics and that needed to change, at least at the top.
For a group of professionals whose success in their livelihoods depends so much on spinning a tail with multiple layers, they are ridiculously short-sighted when it comes to politics and public policy matters, at seeing three, four and five moves ahead and that is where Trump trumps them.
I suggest it best that we wait about a year to 18 months if we wish to see the real results (and frankly, just the start of those results) of these policies bringing significant manufacturing back to the socioeconomically impoverished communities around the country, because we are witnessing the establishment of a foundation which is doing that in an unprecedented manner in the history of our nation.
*While the impact on the trade balance will be significant, the much more impactful and important intermediate term and long-term benefits are economic prosperity for people in communities which have been downtrodden for multiple decades.
This is a really good post. Great job laying out the thesis and argument. I had never thought about US Debt and its relationship to trade. I wish I had been made aware of Sowell in grade school. All we were taught was Keynesian economics. It took some time for me to overcome that erroneous foundation. Thanks for this post.
Me too. Mr. Sowell is our greatest living American.
For those that need an introduction to Mr. Sowell, start with his autobiography, then read his approved biography written by Jason Riley. Then feel free to dive into one of his many stellar books based on what you have learned by reading his autobiography and biography.
Thanks for the article. But there's one thing I'd like to understand and it's the question advocates of free trade never seem to acknowledge or answer.
Put most simply: If country A engages in free trade and country B imposed a 400% tariff on a Country A industry to protect the same industry in Country B, what should country A do?
The silence of free traders on that basic question indicates their answer is "nothing." Is that your position?
Not exactly. There is nuance here. What's the industry? That makes a difference. If it is timber, that is different than microchips. Or, take the case of dairy and Canada. The US is far more efficient at producing milk and could export to Canada except Canada charges a massive tariff over a certain amount of milk.
Solution?
First step, negotiate. Let's assume they say no.
Second step, be transparent with the US dairy industry and general public and call out the crappy unfair trade practice so everyone understands. The tariff will make the Canada dairy industry less productive and efficient with the opposite effect happening for the US.
Third step, see if you can open up more exports to other countries. Canada isn't the only game in town. Keep talking to Canada to see if they will change their mind.
Fourth step, tariff the crap out of Canadian milk coming into the US. It doesn't do much, but sends a message.
Fifth step, start tariffing a lot of their imports.
My biggest beef with Trump was he went nuclear and tried to work backward. However, he might pull it off. For sure, he will spin it like he pulled it off! That's the thing with the press conference and $100B in tariffs. How much at the margin? Probably not a lot yet.
I also think there are some things that shouldn't be that open to free trade. Hi tech electronics for example. Maybe innovative medical depending. I read where the use of drones fundamentally changes the military battlefield as much as the machine gun did-should be be trying to grow a home grown industry and supply chain around them no matter what the cost? Probably.
Canada was the basis of my example. Trump was already president for 4 years. We are way past steps 1 and 2. Step 3 is "do nothing." Dairy exports aren't a big deal in Canada so Step 4 is practically do nothing. Step 5 will finally get something done.
As I said, I believe the problem with free trade philosophy is it never moves to game theory to resolve real issues. Mostly, I believe free trade philosophy is a political argument to protect successful exporters and low tariff importers. If someone represents successful exporters to Canada or importers of goods with low tariffs from Canada, the last thing they want is to have their arrangements upset by US tariffs being raised to solve the barriers set up by Canada in some other industry.
Opportunity costs are not shared equally across the economy. Example scenario - all US shoe factories are closed and all shoes are imported from China. Beneficiaries are US shoe purchasers. Those negatively impacted are unemployed workers from the closed factories. So the "free trade" question is - does the aggregate savings from all US shoe purchasers exceed the lost wages from the fired workers? Maybe. Maybe not. But each fired worker is paying a much higher price for "free trade" than the cools kids saving on their pair of Allbirds.
To say, as you do, that this is only a concern in vital industries such as electronics is the equivalent of saying "Learn to code." My point is that opportunity costs associated with free trade extends beyond dollars and cents, to social, moral, psychological and structural costs. If entire towns are wiped out because free trade caused the largest employer, the local paper mill or local steel mill, to close, any incremental savings that resulted can not offset the damage and devastation from that scenario. Drive through Bridgeport, Ct or any town in western New York state to see what I'm talking about.
It's especially tragic when it's realized that the paper mill and steel mill were destroyed by foreign imports subsidized by foreign governments. It's predatory and it's the one area where our government should really help. There is also the loss of skill and knowledge when these industries disappear because of predatory competition. One of the problems the USA will have in the very near future is this loss of institutional knowledge -- finding people who actually know how to run the machines in the mill, organize the logistics, keep the power on. Sometimes youtube videos just aren't enough.
Lot of economics is needed to understand the entire situation; at least one bachelor’s degree worth.
There are many different aspects to every point you made, and you did a great job trying to explain the costs and benefits of each issue- Thanks.
When it comes to “intellectual property” we try to protect the inventor, creator, because it incentivizes people to be inventive and creative.
Without intellectual property rights we would get into a “steel the bacon” business model. Rather than spending money on Research and development, companies would pay for information about competitors, and keep their powder dry, waiting to pounce on any new product or technology.
The second rat would get the cheese, having not spent capital on research and development, they could avoid dead end efforts, and just do it right-
But intellectual property rights also have a huge negative to consumers. Patents on drugs allow big pharma to gouge us- and charge prices that are beyond the price that would afford them the opportunity to recoup their costs of research and development. They exploit governemnt to keep the patents in place- the longer the better for the company- what’s appropriate? 1,2,5 years? Who decides? Nancy Pelosi and her hedge fund husband Pauly P?-
Just this topic could be an entire Econ class- I know- I took it🤓
The bottom line is China erects all sorts of barriers, they manipulate their currency, prevent us from buying their assets with our strong dollars- Europe puts on tariffs to prevent competition- and given “economies of scale”, which is a huge aspect of all of this, that you can address in your next post, the US has a massive advantage. We have well developed capital markets, and can out produce any entity in Europe- that’s how we own WWII.
So there’s no way to remain pristine in the international trade war.
They “cheat” and steal and copy and manipulate, and we can’t allow other countries to continue.
So Trump has fought back- and it will have all sorts of impacts on everything from inflation to jobs. But I 100% agree with your statements about the “trade balance” it’s a ridiculous number and making it go from negative to positive doesn’t mean we have improved our economy, or made America greater -
Your post asserts that "unfettered free trade is generally a very good thing to have in our lives. It lifts all boats." I once shared such enthusiasm for free trade across all borders. But it has become obvious that ALL boats do not benefit from "unfettered" free trade--it creates winners and losers. Most consumers benefit, but not all producers. It is flawed economic reductionism and short-sighted to tell those whose industries suffer to "move somewhere else," "learn to code," etc. And that insight has been key to Donald Trump's political success.
Fair point. But, how about American's educational system? it sucks and so it is awfully hard to retrain workers. How about America's safety net. Might be too thick. People don't move to opportunity like they used to. They stay put. I think there are several other issues I would like to see resolved a bit better before I abandon free trade. But, your point is about the costs, and how we total up the costs. It's a good one to chew on and there are no good short term answers.
This is a big issue, I think. First, as noted above, the hollowing out of many small and mid-sized, formerly functioning (if not totally prosperous) towns has been horrific to watch over the past 40 or so years. It is destructive not just for the towns but for those families, and I think has led to many of our modern ills of drug use, loss of purpose, broken families and lack of connectedness. In the past, people's reference points were their physical neighbors. But now--and it is NOT just social media I'd posit, but the lack of actual neighbors--that prompts people to see their "community" as a digital one. We humans are relational beings and we need each other to keep ourselves healthy.
Loss of local industry also destroys appropriate pride in one's work. Who will teach the younger workers? Perhaps this explains the huge success of Mike Rowe's apprenticeship programs and scholarships for tradesmen (as well as the chance to make some $$, obviously).
If you have heard Salena Zito speak about her new books she frequently cites the importance of "place" and "rootedness" as part of what comprises values for many, including those who support Trump. I get her point, particularly as someone that has lived away from my family home and traveled widely.
I took a double major in Political Science and Econ at a very well regarded college, yet I can say that the treatment of "free trade" and its merits was quite shallow, honestly, one confined by equations primarily. At this point, and given the huge dangers we face with an out of control leftist/progressive agenda which doesn't stint at violence to obtain their desired outcomes, I don't see academic economics as muscular enough to address this issue.
Finally, on the world stage Trump is right that other countries have been not just dependent, but feckless, in their exploitation of the USA. ESPECIALLY when we have accumulated a lot of debt, which is a grave issue, and in part because of our generosity in foreign wars such as the "War on Terror" which yielded little of merit, and our domestic "War on Poverty", likewise unsuccessful.
Thanks for the article Jeff. Seems to me that debating this issue requires a very broad view that encompasses more than just economics.
Good points. That's what I meant by a "flawed economic reductionist" view: that people are merely economic units (a la Marxism) who can & should be ready & willing to be uprooted from homes and families and communities in pursuit of a new job. To be sure, people and families (and "peoples") do migrate over time, and always have, in search of better lives. But the causes are not just economic. People have always moved or stayed put due to a host of factors including economic, religious, romantic, medical/health, enjoyment, better terrain or weather, etc. A "better life" is not just more money.
Economic harm can be self-inflicted, such as featherbedding and cartelized labor or industry. A different education system should help folks adapt as needed.
But "unfettered" free trade with other countries with their self-serving subsidies, mandates, or national policies can do much harm by forcing hardship on people through no fault of their own.
Deserves more than one heart. Very, very well done.
All the talk around international trade ans economic policy is all the more amusing when you consider that EU countries have paid more for Russian natural gas than they have given in aid to Ukraine. I dont know if this is like robbing peter to pay paul, but its something maybe stupider. I largely agree with pretty much all you said here with one exception. Ive never heae Trump rail against free trade. What ive heard him rail against is unfair trade practices by other nations being use against us to undecut and even eliminate our domestic producers.
What's fair? I think that is subjective, and not objective. It sure seems unfair to me that the EU countries tariff the crap out of US wine and vice versa. But is it?
Whats fair? Eliminate all tariffs. And then welcome to Utopia!
This is just not true: "Faust bargained his soul with Satan and lost." Faust got exactly the deal the devil promised and that Faust accepted; the problem was, Faust wanted to renege at the end of the bargain's term, but Satan made him keep his word. Satan is always scrupulously fair and trustworthy; he just never loses his bet. Well, except that one time when some random hillbilly in Georgia beat him at a fiddle contest.
Fair point. I linked to the article and he delved into it deeply so I didn't want to spend a lot of time on it. Thanks for bringing it up exactly.
"The author further cites, incorrectly, I might add, that it is a terrible thing for foreigners to own equity in US companies."
Would you agree that, by the same logic that says we should not be free-traders on items that are essential for national defense, we should extend that logic to the companies that make those items, even if they are here in the US?
Back when I was working for a living, this was a recurring issue: any company that did business with the Defense Department was subject to strict limitations on what was called in the jargon of the era "FOCI"..."Foreign Ownership, Control, or Influence."
If a foreign company wanted to take over or--as the broader nomenclature implies--get cozier with a US defense contractor than we might like, there was a protocol: in essence the company had to sever its defense-related operations and hide them behind--again, I don't make these terms up--a "Chinese Wall."
In other words, foreign ownership or investment, OK; foreign investment or ownership of a defense contractor, not OK.
So would you accept a carve-out on that basis?
I should note that in the one instance in which I was directly involved, the prospective buyer was a British company, at a time when Britain was our most trusted ally (you might be surprised at the number of times I saw documents with the classification marking "NOFORN EX UK" meaning "No viewing by foreigners, except the UK"). Point being, this was a universal rule, not just applicable to our current adversaries.
I don't think we would disagree. I would limit the amount of equity a foreign government, or foreign fund could have in a specified defense industry. The SEC already has rules on ownership percentages with regard to reporting-so this is not a foreign idea (forgive the pun).
Well done. The only quibble I have is that you lean too heavily on the economic side of things, and not heavily enough on the political. Trump is using tariffs as a political tool, and selling that use as an economic tool. Without selling the tariff income, it would be nearly impossible for him to sell it at all.
That is a fair point and we will see how it plays out.
Thanks Jeff! Another well thought out article.
I respectfully disagree in your overall criticism because neither you or Spencer cover the overall dynamics involved which is understandable in a short essay format. I have followed Spencer for years and he has shown to rarely be dead wrong on this subject.
China's economy has grown at 10% for the last ten years with positive trade deficits. Our country's most prosperous times were the late 19th and earliest 20th century prior to the income tax using tariffs and assumed positive trade deficits.
At the macro level... Ever since we went off the gold standard in 1971 we have run trade deficits and every citizen in the United States has suffered greatly and @brateconomics has the data to prove it.
Jerome Powell is a failed lawyer who is dangerously in control of our money supply and is wrong all the time according to Peter Navarro - and Navarro has been shown to be correct in Trump 1. So was Spencer on tariffs as steel and aluminum prices decreased 23% from 2018 to 2021(along with other dynamics like cheap energy and a tightened money supply).
Have a wonderful day.
China had a smaller base to grow out of so 10% isn't crazy. I'd argue that we have very prosperous times coming, and today seems pretty prosperous depending on how you define it. I like Economist Russ Roberts way with standards of living-or in the words of Rush Limbaugh, "America has the wealthiest poor people in the world."
Yes sir. I respect you greatly and my style is very direct(mainly because I am at work), please don't take anything personally.
The dynamics I mentioned previously: "Global energy prices, domestic energy prices, currency evaluations and fluctuations, state/govt subsidies to manufacturers, labor negotiations and production profit offsets are only a few of the components."
https://theconservativetreehouse.com/blog/2025/07/08/pattern-repeats-imported-durable-goods-creating-deflation-on-u-s-consumer-prices/
I think there is more to the idea of "trade deficit" than you do. But I agree it is a misleading number.
I think most people's thinking would be improved greatly by thinking more in terms of the "balance sheet" than the "income statement" when it comes to international trade.
Running a trade defect certainly doesn't sound bad in it's more distilled form. You get to consume more than you produce. Who wouldn't be in favor of that? The thing that gets left out of discussions on international trade is that there are two ways to consume more than you produce and they are extremely different.
One way is to go sell off everything you have and/or go deep into debt. This is the method used by drug addicts. Sell everything you own. Then borrow everything you can. Works fine until it doesn't.
The other method is to "live off the interest". This is the method used by retirees. Works well, you just have to be careful not to deplete your capital.
The exact same principle applies to international trade. But, like above, the results are worlds apart. You talk about the debt, but almost like it is an unconnected problem. The debt is there BECAUSE of the deficit. THAT DEBT IS HOW WE ARE FINANCING the trade deficit.
If you are a retiree living off the interest, deficit between your earned income and your expenses isn't a bug, it's a feature. It doesn't need to be solved.
However, if you are deep in debt because you keep spending more than you earn, in that case, yes, the deficit is a problem and it is destroying you.
The author conflates the purchase of land and equity (private transactions) with countries purchasing US Treasuries....he is woefully incorrect. The Chinese aren't buying farmland next to US military institutions because of a trade surplus. A private seller of that land isn't doing it because of a trade deficit.
Yes, things are more complicated because aggregates are made of individuals. But the big picture is still simple. The fluid dynamics of water as it flows through a river are impossibly complicated but the fact that a river is flowing down the gradient of a watershed is simple.
Trade is always balanced or it doesn't happen. Something we libertarians praise about the free market all the time.
The US imports more "trade goods" than it exports. That's what the trade deficit measures. Why would China do this?
They do it because we offer them "assets" other than trade goods. These can be debt or equity. They could also be physical capital like land. They can be public or private assets.
But we have to offer them. We aren't offering them as many trade goods as they would need without them. That's what the trade deficit is showing.
As I said there are good and bad reasons to do it. Startups need capital and selling it is a great way for them to operate even though they are in the red right now in the short term. Old established companies consistently operating in the red and borrowing to cover operating expenses is another thing.
So it's not necessarily a bad thing. And as a nation we have individuals doing both. The aggregate number includes both the good type and the bad type.
Which does complicate things, since it is hard to know how much of it is the good type and how much is the bad type. The aggregate number does not distinguish. It also means people can cherry pick just the good or just the bad when making some argument, which is extremely frustrating.
It also means we sometimes tend to talk past each other since, during discussions, in the name of brevity, it all gets lumped together. I can see why that seems like I am conflating things but I promise I am not. It is just that aggregated measure aggregates. If anything is conflating anything, it is the definition of "trade deficit", which puts all things together in a single measure.
We need better statistics than the trade deficit. I suspect when a trade deficit with a particular country is less like a wave and more like a slope that indicates a problem.
Great article, Jeff and thank you.
To understand President Trump, I think we must take into account that he's one of the world's greatest salesmen. To be great at sales you need to understand your, your competitors' and your potential clients'strengths and weaknesses. Knowing his and their strengths is a strong suit of his, knowing their weaknesses is also a strong suit of his, though knowing his own weaknesses not so much. LOL
Nonetheless, he knows that sometimes it is imperative to exaggerate certain aspects of a potential policy to make it palatable to Congress, the media and everyone else, including his competitors, in such a way that shows that we, as the premier and largest consumer in the world, hold the majority of the cards and the winning hand, not the other guys. Just as we discussed back in April in tariff month, the tariffs get the news and have shock value but they're really more of a negotiating strategy than anything else to bring about fair trade policy and fight back against intellectual property theft, ridiculous import export policies that are grossly unbalanced, etc I can remember in the '80s when the monthly trade balance number was considered a significant economic release and today it's generally a nothingburger, although it's gained a little more impact than it had, say a decade ago.
I said it many times before and I will continue to say it:we need to bring a manufacturing base, a strong one, back to rural areas of the United States if we wish to remain the world number one. JD Vance's book, Hillbilly Elegy, was read by Trump and contributed to him being the choice for Vice President. His book has some both subtle and overt great points man about growing up in rural America. When you have a powerful great salesman with balls and brains in charge, who actually cares about people, that's the direction you take, and no, I do not work for the President's or Vice President's public relations firm. 🤣
If we take a look at the whole issue you brought up from a macro/30,000 ft view, what we're experiencing now is only one step in the process; it's not the panacea. Remember that what you wrote about attorneys, who are notoriously ineffective at managing other people's money and managing other people, but damn good at writing lengthy reports and generating billable hours, represent the number one profession of the majority of politicians prior to entering politics and that needed to change, at least at the top.
For a group of professionals whose success in their livelihoods depends so much on spinning a tail with multiple layers, they are ridiculously short-sighted when it comes to politics and public policy matters, at seeing three, four and five moves ahead and that is where Trump trumps them.
I suggest it best that we wait about a year to 18 months if we wish to see the real results (and frankly, just the start of those results) of these policies bringing significant manufacturing back to the socioeconomically impoverished communities around the country, because we are witnessing the establishment of a foundation which is doing that in an unprecedented manner in the history of our nation.
*While the impact on the trade balance will be significant, the much more impactful and important intermediate term and long-term benefits are economic prosperity for people in communities which have been downtrodden for multiple decades.
This is a really good post. Great job laying out the thesis and argument. I had never thought about US Debt and its relationship to trade. I wish I had been made aware of Sowell in grade school. All we were taught was Keynesian economics. It took some time for me to overcome that erroneous foundation. Thanks for this post.
Me too. Mr. Sowell is our greatest living American.
For those that need an introduction to Mr. Sowell, start with his autobiography, then read his approved biography written by Jason Riley. Then feel free to dive into one of his many stellar books based on what you have learned by reading his autobiography and biography.
Sowell is a national treasure.
Thanks for the article. But there's one thing I'd like to understand and it's the question advocates of free trade never seem to acknowledge or answer.
Put most simply: If country A engages in free trade and country B imposed a 400% tariff on a Country A industry to protect the same industry in Country B, what should country A do?
The silence of free traders on that basic question indicates their answer is "nothing." Is that your position?
Not exactly. There is nuance here. What's the industry? That makes a difference. If it is timber, that is different than microchips. Or, take the case of dairy and Canada. The US is far more efficient at producing milk and could export to Canada except Canada charges a massive tariff over a certain amount of milk.
Solution?
First step, negotiate. Let's assume they say no.
Second step, be transparent with the US dairy industry and general public and call out the crappy unfair trade practice so everyone understands. The tariff will make the Canada dairy industry less productive and efficient with the opposite effect happening for the US.
Third step, see if you can open up more exports to other countries. Canada isn't the only game in town. Keep talking to Canada to see if they will change their mind.
Fourth step, tariff the crap out of Canadian milk coming into the US. It doesn't do much, but sends a message.
Fifth step, start tariffing a lot of their imports.
My biggest beef with Trump was he went nuclear and tried to work backward. However, he might pull it off. For sure, he will spin it like he pulled it off! That's the thing with the press conference and $100B in tariffs. How much at the margin? Probably not a lot yet.
I also think there are some things that shouldn't be that open to free trade. Hi tech electronics for example. Maybe innovative medical depending. I read where the use of drones fundamentally changes the military battlefield as much as the machine gun did-should be be trying to grow a home grown industry and supply chain around them no matter what the cost? Probably.
Canada was the basis of my example. Trump was already president for 4 years. We are way past steps 1 and 2. Step 3 is "do nothing." Dairy exports aren't a big deal in Canada so Step 4 is practically do nothing. Step 5 will finally get something done.
As I said, I believe the problem with free trade philosophy is it never moves to game theory to resolve real issues. Mostly, I believe free trade philosophy is a political argument to protect successful exporters and low tariff importers. If someone represents successful exporters to Canada or importers of goods with low tariffs from Canada, the last thing they want is to have their arrangements upset by US tariffs being raised to solve the barriers set up by Canada in some other industry.