Dumb Trade Policy

Dumb Trade Policy 

By Lawrence W. Reed

“No good deed goes unpunished,” a well-worn proverb tells us. Israelis can attest to that, thanks to a foolish act of the Trump administration.

When President Trump announced a wave of new and higher tariffs in the first week of April, the nation of Israel responded by cancelling all its tariffs on imports from the U.S. Since Trump claims his aim is “reciprocity,” Jerusalem had every reason to expect U.S. tariffs on its goods to go to zero too.

Instead, Washington imposed 17 percent tariffs on Israeli goods.

What explains the duplicity? Reciprocity is less important to President Trump than the so-called balance of trade. Israel sold $8 billion more in goods to America in 2024 than it purchased from America, which means they had a surplus and we had a deficit. In the convoluted formula the Trump team devised to determine tariff rates, abolishing its tariffs isn’t enough for a country to get reciprocity from Washington; it must buy as much in goods from the U.S. as it sells to us.

This means that it was somehow wrong for Israel to sell us so much last year, even though every sale implies a willing buyer and both sides to every trade benefit or neither would engage in it in the first place. If only Israel had loaded $8 billion in goods on ships bound for America last year and then sunk them all in the Atlantic, it would qualify now for zero tariffs from Washington (and Americans would be $8 billion in goods poorer).

Another way to look at it is this: If Israeli exporters are the culprits here, then American importers and consumers are their enablers and accomplices. Because it takes two to tango, Israelis can only sell to us if we choose to buy from them, and there’s no earthly reason why the resulting “balance of trade” should be of concern to anybody. I have a balance of trade deficit with Walmart because the flow of goods is entirely one way—from Walmart to me. Walmart buys nothing from me, but nobody complains.

The balance of trade is a non-problem that would disappear if we just fired the statisticians who compile the numbers.

Suppose the rest of the world shipped us all their goods and accepted nothing in return. We could keep our stuff and enjoy all of theirs. That sounds like a good deal, doesn’t it? But the number crunchers in the Commerce Department would cry foul. Our balance of trade deficit would be immense, but we’d nonetheless be richer, not poorer, because of it.

Imagine the opposite: America ships all its goods to the rest of the world and accepts no goods in return. Massive balance of trade surplus! But would draining ourselves of goods and accepting none from abroad be beneficial? We shouldn’t have to ask. Adam Smith gave us the answer 249 years ago. See https://tinyurl.com/k65fmz64

If you’re not convinced, then try it yourself. Give all your stuff to somebody else and don’t let them give you any of theirs. Merry Christmas.

Of course, when foreigners sell us goods, they earn dollars. They don’t burn them. If they don’t use all those dollars to buy goods from us, they can sell them on the foreign exchange market to someone who will. Or—and this is very significant—they can invest those dollars in the U.S. They can fund the government’s atrocious fiscal deficit by purchasing Treasury bonds, notes, and bills. They can buy American stocks, bonds, and other assets. That’s the sort of capital investment that any healthy economy attracts, but not a penny of it is counted in the “balance of trade.” The Trump administration’s tariff policy is myopically focused on the flow of goods, not capital.

Capital investment in the U.S. is not peanuts. The Global Business Alliance https://tinyurl.com/d9wwzrn8 reports,

Foreign direct investment in the United States, known as FDIUS, reached $5.4 trillion cumulatively at the end of 2023 on a historical-cost basis. Every year, international firms make new investments, which benefit the American economy in numerous ways. They build new factories, fund U.S.-based research and development (R&D), and grow their well-established U.S. operations. International companies employ 7.9 million Americans in well-paying jobs.

Moreover, the Trump administration’s reckoning of the trade balance doesn’t include services. Foreigners buy a lot of those (especially from the financial sector)—so much so that the U.S. runs a consistent surplus in the trade of services.

So, if it’s a trade surplus or just an even-steven balance of trade in goods that you want, we should just tell the rest of the world, “Take our stuff and don’t invest here.” By President Trump’s reasoning, that’ll teach them a lesson (even if it doesn’t teach us one).

Worrying about the balance of trade is misplaced. Basing a nation’s trade policy on it is worse; it’s dumb and destructive. There are problems to fix in international trade, but the silly trade balance isn’t one of them. Fuhgeddaboudit.

#####

(Lawrence W. Reed is President Emeritus, Humphreys Family Senior Fellow and Ron Manners Global Ambassador for Liberty at the Foundation for Economic Education in Atlanta, Georgia. He blogs at www.lawrencewreed.com.)