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July 5, 2020

More Presidential Confusion on Trade

It is time to write about foreign trade again, sadly. Over the past few weeks the Trump Administration has been locked in ongoing trade negotiations with China and announced the suspension of perhaps a half million visas for foreign workers. These two issues are tied closely, as I shall shortly explain. 

Faithful readers of this column will know a few facts about trade deficits. A trade deficit does not affect our Gross Domestic Product nor make our economy larger or smaller. Neither does a trade deficit reduce the number of American jobs. What trade does do is improve efficiency in the economy and shift the types of jobs available for both American and foreign workers. Here’s how that works. 

The United States is an affluent nation with a productive workforce. Taxpayers invest at least $150,000 per student to complete high school, and we have a vast network of road, rail, water and air transportation. We have a broad regulatory environment that aims to preserve the health and safety of citizens and the best universities in the world. 

For these reasons, we specialize in goods and services that require a skilled workforce, clean and productive land, reliable transportation and advanced technology. For the most part, we import things that require less of all these. This is what rich nations do. 

We are able to import more than we export because other nations lend us money to do so. The reason they do this is that unlike most of the world, investing in the United States is safe. In fact, many current investors accept interest rates that are less than zero, so in effect, pay us to borrow their money. Again, that is a benefit of being a rich, secure nation. 

Apparently, the Trump Administration doesn’t like this arrangement. They tell American voters that they are going to ‘rebalance’ trade. This, they say, will come about by re-shoring supply chains and will result in more American jobs. This is a seductive promise. It is also a lie.

In a better world, I’d say the Administration was simply mistaken on trade. Perhaps I could appeal to high school economics, or two centuries of research on trade. But this isn’t a mistake, it is an intentional distortion. To prove the Trump Administration is intentionally misleading Americans, I need only outline the hypocrisy of the visa restrictions and what that would do to our export market.

Last year, almost a million foreign students were in U.S. universities. Most of these students require summer jobs to pay for college or come here with the hope of working at a U.S. business after finishing their degree. The Trump Administration effectively put an end to that with the broad visa restrictions they put in place last month. In this lies a deep hypocrisy on trade, which is at the center of the Administration’s duplicity.

The U.S. imports almost $500 billion more in goods than it exports each year. However, we export $250 billion more in services than we import each year. The U.S. is the world’s top exporter of services such as education, financial services and software. Foreign college students and workers are a huge source of the export of services. 

If, like the Trump Administration, you think the trade deficit matters, the absolutely last thing you’d do is to cut back on exported services. Instead, you’d want to do all you could to boost exports of services. However, he is doing exactly the opposite. The visa restrictions will decrease our export of services, shrinking the positive balance of trade we have in this area. To be clear, the Trump Administration is accelerating the trade imbalance in the quickest way possible. 

Mr. Trump cannot claim that importing more than we export is bad, and then label his historic step to slash exports as good. Honest citizens cannot let him have it both ways. 

Now, to be clear, the Trump Administration has always been deeply mistaken about trade. They don’t even understand the arguments about trade that informed our own Constitution. But that is not the point I make here. My point is that judged against their own mistaken logic on trade, the visa restriction is poor policy. 

The decision to suspend visas will unilaterally reduce our exports of services, and almost certainly shift supply chains for services offshore. I don’t hold out much hope this policy will be reversed this year. If anything, the Trump Administration has proven itself unsusceptible to correcting its own gaffes. That is a particularly poor characteristic for an Administration that seems to work overtime in discovering new blunders. 

Link to this commentary: https://commentaries.cberdata.org/1063/more-presidential-confusion-on-trade

Tags: trade, international, foreign policy, pres. trump administration, workforce and human capital, china


About the Author

Michael Hicks cberdirector@bsu.edu

Michael J. Hicks, PhD, is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University. Note: The views expressed here are solely those of the author, and do not represent those of funders, associations, any entity of Ball State University, or its governing body.

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