Mercantilist sentiments are dangerous nonsense

Some erroneous ideas die hard. That diseases are caused by “miasmas” no longer influences doctors. Farmers no longer believe, as the Greeks did, that the west wind somehow impregnates mares. But mercantilism, the erroneous notion that exports are inherently good and imports always bad is not only alive and well in the general populace, but has a grip on the president of our nation and on his commerce secretary. This has the potential for disaster.

I know by experience that this general theme of mercantilism rings true for many people and it is difficult to counteract. But the president takes it to a higher level. He and Commerce Secretary Wilbur Ross believe that bi-lateral trade balances, the flows between two counties taken in isolation, are an important indicator of effects on the economies. For them, a trade deficit between our nation and another, meaning the value of our imports from the other country are greater than our exports to that country, indicate that we are suffering economic harm and that our trading partner with the surplus is reaping some unjust benefit.

Even beyond this, they apparently believe that when such an ‘imbalance” occurs, it is not a result of random circumstance. Rather, it results from conscious, hostile policies and actions on the part of the surplus nation to harm the U.S. In turn, President Donald Trump successively has termed the Chinese, Canadians, Mexicans and now the Germans as being “bad, very bad” because the value of items from sellers in those countries to U.S. buyers exceed flows in the other direction.

This is utter nonsense. It is stupidity. These are strong words, but they need to be said because the course Trump seems to be setting will eventually harm our own nation greatly.

Start thinking about this by looking at flows between different states in our own nation. What if Minnesotans spend more buying orange juice from Florida than we bring in selling Florida heart valves and wheat flour? Is Florida cheating us? Taking jobs away from us? Being “very bad” to us? Is the imbalance due to anything the Florida government is doing that Minnesota’s government is failing to properly counter?

What about New York, a medium-sized state in area but with a large population? It imports food and manufactured goods from other states. It no longer manufactures a lot so it doesn’t sell nearly as much merchandise to other states. Is this a sign that New York is being damaged? Are other states being bad to it? Or what about Wyoming? It exports millions of tons of coal plus cattle and some wheat to other states, all worth much more value than its relatively small population imports. If a power plant in Texas burns Montana coal are Texans getting screwed? Should all the states that buy more from Wyoming than they sell to it get together and force those cowboys to clean up their act?

Of course not. This is preposterous. Yes, states are not nations, not least because they don’t have their own currencies. But the analogy is more valid than you might think.

Trade between states obviously is multi-lateral. Wyoming coal generates electricity at a plant in eastern Missouri which flows into a grid serving Tennessee so power from a Duke Energy plant yet further east is not needed and instead flows to the Florida panhandle. Orange juice from that state goes to a car factory in South Carolina that sells a sedan to an engineer in Minnesota whose employer sells a heart valve put into the chest of some Wyoming rancher.

The United States buys a lot of clothing from China and we have a big “deficit” with that nation; but China in turn gets most of the spinning, weaving dying and sewing done in Bangladesh or Vietnam and has deficits with those countries. But these poor countries buy medical devices and food from the United States and we have “surpluses” with them. Are we out to damage the Bangladesh and Vietnamese economies, to hurt their workers or consumers? Would they be better off if they closed their borders to food from elsewhere so that their farmers could get higher prices from their own population?

Again, of course not. There is no economic indicator that is more meaningless than a tabulation of trade between two individual countries disregarding all other world trade and other financial flows. The publication of this data unfortunately causes more harm than good.

Germany is the target of Trump’s ire last week. Yet German tourists spend much more in our country than U.S. tourists spend in theirs. Should German Chancellor Angela Merkel shake a verbal fist at Trump, warning him that the economic aggression represented by Disney World, Broadway and Old Faithful has to stop?

Take that to the next argument embodied in presidential tweets. What is the U.S. government doing to push U.S. tourism down the ravaged throats of German consumers? How did we get Australia over a barrel so that they have to buy more than twice as much from us as we let in from them? Or the United Arab Emirates, that sell us some oil but that we somehow screw into buying seven times as much in our exports?

In market-based economies, countries do not sell to each other. Companies do. The government of the United States does not sell the Kingdom of the Netherlands soybeans. Cargill, a Minnesota company, buys soybeans from Minnesota — and Brazilian — farmers and sells them to a Dutch farm-cooperative feed company which prepares rations for a Dutch dairy operator in Friesland. Would the Netherlands be better off if it imposed a higher tariff on imported soybeans so that its own oilseed growers could make better profits, buy more Dutch-made tractors and hire more workers? After all, they already buy 2.5 times as much from us as we buy from them. But the answer is still no!

Yes, monetary policies that influence exchange rates do affect trade flows. Yes, a strong dollar compared to the euro does affect trade flows between Germany and the United States. Yes, the world economy would probably be better off if Germans saved a bit less and spent a bit more. But Germany does not set Eurozone monetary policy. In fact, the policies of the European Central Bank over the last half decade have been opposed by Germany.

And while Germans perhaps should save less and their government itself spend more, the bilateral trade balance would “improve” from the mercantilist point of view if Americans saved more, took on less debt and if the U.S. government reduced its budget deficits. That is the core of the problem. But it is also the subject of a different column.