Global Justice Now / Flickr TrumpDiTprotest1...
Global Justice Now / Flickr

 

Donald Trump has a complete, and very specific, misunderstanding about what the phrases “trade surplus” or “trade deficit” mean.

First, a quick Econ 101 Review:
Trade Surplus is the amount by which the value of a country’s exports exceeds the cost of its imports.

Producer Surplus is the amount that producers benefit by selling at a market price that is higher than the least that they would be willing to sell for; this is roughly equal to profit margin.

Donald Trump essentially thinks that Trade Surplus is to Trade between Nations as Producer Surplus is to a transaction between a Producer and a Consumer.  A party’s Producer Surplus could reasonably described as profit.  A country’s Trade Surplus is NOT, very decidedly NOT, the same type of measurement.

Trump mistakenly believes Trade Surplus to be something along the lines of a measure of one country’s margin of profit over the other country, and he likewise mistakenly believes that Trade Deficit, as the counterpart to Trade Surplus, represents the losses of the counterparty. (To be clear, I am not arguing that Trump is familiar with the term Producer Surplus and is mistakenly treating Trade Surplus in the same way – I simply think that starting with the actual definition of Producer Surplus is the best frame of reference for a rational human to understand Trump’s mind here. I would be surprised if he could accurately define any economic terms.)

I have seen many commentators try to explain that Trade Deficit is a poor measure of determining whether a trade arrangement is beneficial to a particular country; these arguments are certainly true, but they miss the point.  Despite the words he uses, Donald Trump is not driven by a desire to increase the value of America’s exports or decrease the value of its imports – what he really wants is to decrease the (imaginary) Profit Margins of other countries.

The big problem here is not that Trump mistakenly believes that the difference between imports and exports (commonly referred to by all non-Trump humans as a trade deficit or surplus) is a useful way to determine which party is getting the better end of a transaction.  The problem is that Trump thinks “Trade Deficit” — and by this I mean the phrase “Trade Deficit”, and not trade deficit according to its actual definition – literally is a measure of which party is getting the better end of a transaction – that it is essentially a measure of profits and losses.

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We’re losing a tremendous amount of money, according to many stats, $800 billion a year on trade. So we are spending a fortune on military in order to lose $800 billion. That doesn’t sound like it’s smart to me.

— Donald J. Trump, March 5, 2018

We have a very big trade deficit with [South Korea], and we protect them. We lose money on trade, and we lose money on the military.
— Donald J. Trump, March 14, 2018.

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When he sees a number identified as a “trade surplus”, he believes he is looking at a number representing Net Trade Profits.  As to the specifics of how he believes it to be calculated, I have no idea, and I doubt that he does either.  I assume that he has given it very little thought – calculating things like that is an activity for the nerds that he pays to handle the nerd stuff – and he considers his role as looking at those numbers and getting better “deals”.

So, in a scenario where the United States has a “trade deficit” of $100 Billion with Japan, Trump thinks that Japan is literally making $100 Billion more than it should be off of Americans (as in, he thinks that Japan should be able to cut the US a $99 Billion check, get nothing in return, and still come out as the “winner” in its dealings with America; or more to the point, he thinks that Mexico has enough excess profit lying around that paying for his stupid wall should be no problem). He doesn’t understand why a purported ally would rip off another country like that, and doesn’t understand why prior administrations have been allowing this to happen.  Trump isn’t concerned about an overall net balance between all of America’s imports and all of its exports — net trade balance is a meaningless concept to him. He thinks that each and every single instance of any country having a Trade Surplus in its dealings with the United States represents an avoidable American loss, and he wants to avoid having a deficit with any country.

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When they say “but Mexico can’t pay for the wall,” I say of course they can. We have a trade deficit with Mexico that’s unbelievably big. Humongous. It’s a humongous number. It’s billions and billions of dollars — far more than what we’re talking about for the wall. The wall’s peanuts compared to that.

— Donald J. Trump, January 20, 2016

The fact is that the United States has trade deficits with many, many countries, and we cannot allow that to continue.  And we’ll start with South Korea right now.  But we cannot allow that to continue.  This is really a statement that I make about all trade.  For many, many years, the United States has suffered through massive trade deficits.

— Donald J. Trump, June 30, 2017 (emphasis added)

You look at our trade deficit with….these countries are our allies. It’s unbelievable. And they understand it. I don’t blame them. I told Japan — so we lose 100 billion dollars a year with Japan — 100 billion.

— Donald J. Trump, March 14, 2018.

Trudeau came to see me. He’s a good guy, Justin. He said, “No, no, we have no trade deficit with you, we have none. Donald, please”…Nice guy, good-looking guy, comes in — “Donald, we have no trade deficit.” He’s very proud because everybody else, you know, we’re getting killed.

… So, he’s proud. I said, “Wrong, Justin, you do.” I didn’t even know. … I had no idea. I just said, “You’re wrong.” You know why? Because we’re so stupid. … And I thought they were smart. I said, “You’re wrong, Justin.” He said, “Nope, we have no trade deficit.” I said, “Well, in that case, I feel differently,” I said, “but I don’t believe it.” I sent one of our guys out, his guy, my guy, they went out, I said, “Check, because I can’t believe it.”
“Well, sir, you’re actually right. We have no deficit, but that doesn’t include energy and timber. … And when you do, we lose $17 billion a year.” It’s incredible.

— Donald J. Trump, March 14, 2018.

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Trump seems to think these numbers are basically set by various trade deals – for instance, NAFTA requires the US to accept $50 worth of Mexican goods/money in exchange for $100 worth of our own goods/money; hence, it’s a “bad deal.”
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We have large trade deficits with Mexico and Canada. NAFTA, which is under renegotiation right now, has been a bad deal for U.S.A. Massive relocation of companies & jobs. Tariffs on Steel and Aluminum will only come off if new & fair NAFTA agreement is signed.
— Donald J. Trump (@realDonaldTrump) March 5, 2018
The United States has an $800 Billion Dollar Yearly Trade Deficit because of our “very stupid” trade deals and policies. Our jobs and wealth are being given to other countries that have taken advantage of us for years. They laugh at what fools our leaders have been. No more!
— Donald J. Trump (@realDonaldTrump) March 3, 2018 (emphasis added)
We are on the losing side of almost all trade deals. Our friends and enemies have taken advantage of the U.S. for many years.
— Donald J. Trump (@realDonaldTrump) March 5, 2018
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If you look at his positions and statements and pretend that the phrase “Trade Surplus” actually means “Net Profits” and the phrase “Trade Deficit” actually means “Net Losses”, it starts to fit (well, fits much better than if you try to use actual definitions of words). Many people seem to think that his statements on trade are just pandering, but I think it is something deeper than that, for two reasons:

1. Trump doesn’t just say that a trade deficit is bad; he acts as if the country with the deficit is obviously the party that got the bad end of the deal, had stupid leaders, were terrible negotiators, etc. He doesn’t need to take that position to appeal to his base; if he actually understood at all what a trade deficit really meant, he would use some other metric that was even slightly defensible (job losses, for instance). On the other hand, if “Trade Deficit” meant “Net Losses”, then a deficit would be indicative of a bad transaction, and Trump’s words make sense (well maybe not “make sense”, but are at least internally consistent).

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We lost, over the last number of years, $800 billion a year. Not a half a million dollars, not 12 cents. We lost $800 billion a year on trade.
— Donald J. Trump, March 5, 2018
China has been asked to develop a plan for the year of a One Billion Dollar reduction in their massive Trade Deficit with the United States. Our relationship with China has been a very good one, and we look forward to seeing what ideas they come back with. We must act soon!
— Donald J. Trump (@realDonaldTrump) March 7, 2018 (Later “corrected” to $100 Billion, but that is beside the point…these are not words of someone who understands that he is effectively asking China to stop selling so many things to the United States.)
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2. Trump repeatedly says, and based on his actions appears to believe, that as a rule, the party with the trade deficit is in a much stronger bargaining position. This makes no sense in the real world, as there is no way to look at a transaction with no context and determine whether the transaction was more important to the buyer or the seller. On the other hand, if he thinks that “Trade Deficit” means “how much you are down in this transaction”, then the party with the deficit would indeed be better positioned, because they would be currently wasting money and could easily improve their position by trading with someone else at less of a loss, whereas someone with a “Trade Surplus”, or in his mind, a publicly known margin of profit, has no room to negotiate.
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When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!
— Donald J. Trump (@realDonaldTrump) March 2, 2018
We do have a Trade Deficit with Canada, as we do with almost all countries (some of them massive). P.M. Justin Trudeau of Canada, a very good guy, doesn’t like saying that Canada has a Surplus vs. the U.S.(negotiating), but they do…they almost all do…and that’s how I know!
— Donald J. Trump (@realDonaldTrump) March 15, 2018 (emphasis added)
We’ll have to see; when we’re behind on every single country, trade wars aren’t so bad, do you understand what I mean by that?
— Donald J. Trump, March 2, 2018
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There are many more quotes available, but the ones I included here are from the first few articles that came up when I searched for “Trump” and “Trade Deficit”. The entire world trade system is going to be disrupted because the President of the United States does not understand what “Trade Deficit” actually measures.  I’ve seen plenty of comments and articles, etc., about how “trade deficit” is a poor measure to use to evaluate trade between countries, but no one has pointed out that Trump has no clue what the words mean and is using his own nonsense definition.  This is ridiculous.
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