Unorthodox theories underpin Trump EO seeking report on trade deficits

In a flurry of trade related moves late last week, the Trump administration announced that it will undertake a 90-day review to determine why the United States runs bilateral trade deficits with certain countries.

U.S. Commerce Secretary Wilbur Ross said the review will inform the administration’s trade policy “based on hard facts — not theories.” The subsequent Executive Order on Friday proceeded to rely on a theory about the trade deficit that virtually guarantees the administration’s study will lead to the wrong set of recommendations.

For each of the “foreign trading partners with which the United States had a significant trade deficit in goods in 2016,” the mandated report will:

assess the major causes of the trade deficit, including, as applicable, differential tariffs, non-tariff barriers, injurious dumping, injurious government subsidization, intellectual property theft, forced technology transfer, denial of worker rights and labor standards, and any other form of discrimination against the commerce of the United States or other factors contributing to the deficit.

Note the report does not acknowledge the possibility that we run a large bilateral goods deficit with another country for benign reasons such as the other country’s comparative advantage in goods Americans are especially keen to buy, or differing levels of national savings and investment, or the special attractiveness of U.S. assets to the other country’s multinational companies or central bank, or other drivers of foreign trade that are fair and normal.

The unspoken but deeply held theories that underpin many of the pronouncements on trade from the Trump administration do not allow for such possibilities.

For an alternative explanation, based on trade theories that have been held by most economists from Adam Smith to our day, as well as plenty of hard facts, check out my recent Mercatus paper, “Plumbing America’s Balance of Trade.”