When it comes to trade, the ‘Deal-Maker-in-Chief’ gets his deal-making completely upside-down and backwards
According to the Amazon.com page for the book Trump: The Art of the Deal Donald Trump is “America’s foremost deal-maker” and his 1987 book gives us “an unguarded look at the mind of a brilliant entrepreneur and an unprecedented education in the art of the deal.”
Without reading the book, I’ll assume that Donald Trump would agree that when negotiating a deal, the goal of a successful deal-maker would be to maximize what he gets and minimizes what he has to give up in return. For example, when negotiating deals globally for furnishing Trump Hotels, I’m confident that Mr. Trump tries very hard to maximize the quantity and quality of the goods he acquires from overseas to furnish his properties (see graphic above) and minimize what he gives up in return (cash, in-kind payments that might include the advertising of furnishings at Trump Hotels or credits for lodging at Trump Hotels, etc.).
Even most of us know from our own experiences negotiating that we always want to maximize what we get and minimize what we have to give up in return. For example:
- When you buy a car, you try to get the “most car” (e.g. most options) at the lowest price and lowest monthly payments.
- When you buy a house, you try to get the “most house” (e.g. largest square footage, best furnishings, materials and appliances) at the lowest price and lowest monthly payments.
- When a labor union negotiates a contract, it tries to get the most it can from the employer on behalf of its membership (highest wage increases, most generous fringe benefits, highest bonuses, longest paid breaks, etc.) and agrees to the lowest possible level of concessions (co-payments for medical insurance, layoffs/workforce reductions from automation).
- When you negotiate individually with an employer, you try to maximize your compensation (salary, fringe benefits, moving expenses, work-related travel expenses, sabbaticals, etc.) and minimize your effort level (hours worked per week, working weekends, out-of-town travel, teaching loads for college professors, etc.).
Q: When it comes to international trade, shouldn’t the goal be to: a) maximize the amount of goods we get from other countries, and b) minimize the amount of our own goods that we have to give up? That is, doesn’t our standard of living depend on maximizing imports and minimizing exports? After all, exports are goods that are produced domestically, but whose consumption is enjoyed by foreigners. And imports are goods produced somewhere else (Mexico, Canada or China) but whose consumption is enjoyed by Americans. For example, at the household level, doesn’t your family benefit the most when the amount of goods and services flowing into your household is maximized while minimizing the goods and services flowing out of your household (labor services, goods produced by family members, and cash payments)?
And yet, when it comes to international trade, deal-maker Trump gets his negotiating principles completely backwards, reversed, and upside-down. According to “America’s foremost deal-maker” the US should maximize the amount of goods we produce and send to other countries for their consumption and enjoyment, and then minimize the amount of goods produced in other countries that are sent here for the consumption and enjoyment of Americans. That is, Trump wants to maximize America’s exports and minimize our imports, which means he wants to minimize what we get (import) and maximize what we give up (export). And unfortunately that’s the “first authentic protectionist in the White House since the 1920s” engaged in actively recycling and promoting the discredited theory of mercantilism. Trump might promote himself as a cutting-edge negotiator and deal-maker, but his recycled mercantilist and protectionist agenda was completely discredited almost 200 years ago by Ricardo’s principle of comparative advantage, and was subsequently abandoned by the UK back in 1840!
Bottom Line: I’m pretty sure that if Donald Trump had conducted his business negotiations and deal-making like he now wants to conduct international trade policy for the US, he would have gone bankrupt a long time ago. Which is pretty much the same economic outcome we can now expect for the US if the Deal-Maker-in-Chief gets his way and advances an upside-down mercantilist trade agenda that even violates his own deal-making principles.
For some remedial education on the basic economics of international trade, I would refer President Trump to Milton Friedman’s 1978 lecture on free trade and protectionism in the video below, with special emphasis on this key excerpt (at about 20:40, my emphasis):
In the international trade area, the language is almost always about how we must export, and what’s really good is an industry that produces exports. And if we buy from abroad and import, that’s bad. But surely that’s upside-down. What we send abroad we can’t eat, we can’t wear, we can’t use for our houses. The goods and services we send abroad, are goods and services not available to us. On the other hand, the goods and services we import, they provide us with TV sets we can watch, automobiles we can drive, with all sorts of nice things for us to use. The gain from foreign trade is what we import. What we export is the cost of getting those imports. And the proper objective for a nation as Adam Smith put it, is to arrange things, so we get as large a volume of imports as possible, for as small a volume of exports as possible.
Note that’s exactly the opposite of Trump’s mercantilist approach of giving up the largest volume of exports in return for the smallest volume of imports.
This carries over to the terminology we use. When people talk about a favorable balance of trade, what is that term taken to mean? It’s taken to mean that we export more than we import. But from the point of view of our well-being, that’s an unfavorable balance. That means we’re sending out more goods and getting fewer in. Each of you in your private household would know better than that. You don’t regard it as a favorable balance when you have to send out more goods to get less coming in. It’s favorable when you can get more by sending out less.
First published at AEIdeas on January 30, 2017.