YES, TRADE DEFICITS MATTER

Our country has been behaving like an extraordinarily rich family that possesses an immense farm. In order to consume 4% more than we produce— that’s the trade deficit—we have, day by day, been both selling pieces of the farm and increasing the mortgage on what we still own. Warren Buffett37

Historically, one line of attack against attempts to implement fair trade policies in the name of reducing America’s massive and chronic trade deficit has been the claim that “trade deficits don’t matter.” The intellectual tip of this spear has often been think tanks that generate reams of analyses in support of a purely free trade (and open borders) American posture.38 Yet both common sense and several very good reasons tell us that trade deficits matter a great deal.

Economic Security. The economic security argument that trade deficits matter begins with the observation that growth in any country’s real, inflation-adjusted gross domestic product (GDP) depends on only four factors: consumption, gov- ernment spending, business investment, and net exports (the difference between exports and imports). Reducing a trade deficit through implementation of the U.S. Reciprocal Trade Act, the application of tariffs, or renegotiating a bad trade deal like NAFTA all represent ways to increase net exports—and thereby boost the rate of economic growth.

Suppose, for example, that under the USRTA the American President persuaded India to reduce its very high protectionist tariffs and Japan to lower its formidable nontariff barriers. America would surely sell more Florida oranges, Washington apples, California wine, Wisconsin cheese, and Harley-Davidson motorcycles. The resultant fall in the trade deficit would increase America’s GDP, and the real wages of blue-collar America would rise from Seattle and Orlando to Sonoma and Mil- waukee. But that’s not all.

Consider, too, the investment term in the GDP growth equation. When U.S. companies offshore their production to chase cheap labor or manufacture in a “pollution haven” country like Communist China or India with lax environmental regulations, the result is reduced nonresidential fixed investment—and a GDP growth rate that is lower than it would be otherwise. Moreover, if such offshored production results in more foreign exports to the U.S.—for example, an American consumer buys a Made in Mexico Dodge Journey or Chevrolet Trax rather than a vehicle assembled in Detroit—the trade deficit rises along with the fall in invest- ment, further reducing GDP growth. National Security. The national security argument that trade deficits matter begins with America’s national-income accounting double-entry system and this accounting identity: Any deficit in the current account caused by imbalanced trade must be offset by a surplus in the capital account, meaning foreign invest- ment in the U.S.

In the short term, this balance-of-payments equilibrium may indeed “not matter” as foreigners return our trade-deficit dollars to American shores by seemingly benignly investing in U.S. government bonds and stocks. Of course, this infusion of foreign capital lowers American mortgage rates and keeps the stock market bullishly capitalized, which appears to be all to the good. Over time, however, running large and persistent trade deficits leads to a massive transfer of American wealth offshore into foreign hands. This wealth transfer happens as foreigners use their export dollars to buy American real estate, companies, and financial assets like the aforementioned stocks and government bonds. The American investor Warren Buffett has referred to such wealth transfers offshore as “conquest by purchase.” To Buffett, the big danger is that foreigners will eventually own so many U.S. government bonds that Americans will wind up working longer hours just to survive and service that foreign debt. There is an even bigger national security danger, however, that Mr. Buffett has missed: an alternative conquest-by-purchase scenario. Suppose, for example, that one of the biggest holders of U.S. dollars is a rapidly militarizing strategic rival like Communist China that is intent on world hegemony. By buying up America’s com- panies, technologies, farmland, food producers, and key elements of the domestic supply chain, Communist China can thereby gain more and more control of the U.S. manufacturing and defense-industrial base.

In this scenario, might America thereby lose a broader war for America’s freedom and prosperity, not by shots fired but by American cash registers ringing up “Made in China” products? Might America even lose a broader hot war because it sent its defense industrial base abroad on the wings of a persistent trade deficit? It follows that for both economic and national security reasons, trade deficits do indeed matter. It is therefore of critical importance that we bring America’s global trade back into balance through free, fair, balanced, and reciprocal trade and that we do so through the kind of policy initiatives and reforms recommended in this chapter.

PERSONNEL IS TRADE POLICY

Having a clear set of trade and industrial policies to achieve one’s economic and national security goals, while essential, is not enough. The lessons of the Nixon, Reagan, and Trump Administrations teach us that “personnel is policy” or, in this case, that “bad personnel will mean bad trade policy.”39 That is why it will be equally critical to the next President’s trade policy agenda to have key personnel in place who not only have the skills to implement the policies, but also have the firm commitment to do so.

During the Trump Administration, President Trump’s key policy advisers and Cabinet officials clashed on the issues of international trade and combating Communist China’s economic aggression. As much as President Trump did on the trade front that was bold and innovative and as much as he achieved by chal- lenging Communist China, too much of his trade policy was disrupted or derailed by key personnel who did not share the President’s vision of fair, balanced, and reciprocal trade.

In thinking about the personnel positions that are most essential to effective implementation of trade policy, the most obvious position to get exactly right is that of the United States Trade Representative. The USTR is at least putatively the top official on trade policy, and it is critical that this position be filled wisely. Historically, during Republican Administrations, the USTR has been a free trader who rarely challenged the protectionist and mercantilist policies of Amer- ica’s trading partners and typically would seek to expand global trade. The Trump Administration broke this globalist Republican tradition by appointing as USTR attorney Robert E. Lighthizer, who not only had a keen understanding of the vari- ous legal levers a President can use to advance trade policy, but also was committed to the President’s fair, balanced, and reciprocal trade agenda. The next Adminis- tration should make every effort to find someone with that understanding and that commitment to fill this position. Less obvious—but almost as important—is the need to fill the position of Under Secretary of Commerce for International Trade wisely. One of the most important functions of the International Trade Administration, which is an agency in the Department of Commerce, is to impose antidumping and countervailing duties

CONCLUSION

A Harvard professor once told me during my doctoral thesis days that “if I tell you how it is, I’ve told you why it can’t change.” Despite the obvious exploitation of American farmers, ranchers, manufacturers, and workers by the international trading system and Communist Chinese aggression, powerful political forces none- theless exist that profit from the status quo. The stark lesson of this chapter is that America gets fleeced every day in the global marketplace both by a predatory Communist China and by an institution- ally unfair and nonreciprocal WTO. Addressing these two challenges would go a long way toward restoring American greatness, both economically and militarily. Ignoring these two challenges will simply continue the parasitic draining of the American manufacturing and defense industrial base. AUTHOR’S NOTE: The author alone assumes responsibility for the content of this chapter, and no views expressed herein should be attributed to any other individual. However, the author would particularly like to thank Joanna Miller for her dedicated work and significant contribution to the chapter.

against trade cheaters who dump products below cost into American markets or unfairly subsidize their exports. In fact, much of the cheating that does take place in the global trading arena can be addressed through such antidumping (AD) and countervailing duty (CVD) cases.

Within the West Wing itself, it is equally critical that the National Security Adviser, the Chairman of the Council of Economic Advisers (CEA), and the Director of the National Economic Council (NEC) all be aligned on trade policy. During the Trump Administration, with the notable exception of the President’s third National Security Adviser, Robert O’Brien, and third CEA Chairman, Tyler Goodspeed, this regrettably was not the case.

Finally, and perhaps surprisingly, the Secretary of Defense plays a key role in trade policy, at least when it comes to advancing Section 232 cases. Under Section 232 of the Trade Expansion Act of 1962,40 the President has the authority, through tariffs or other means, to reduce imports from other countries “if the President determines that such reduction or elimination would threaten to impair the national security.” As a practical matter, the Secretary of Commerce spearheads any Section 232 cases, but in order to proceed with a Section 232 case, Commerce must obtain signoff from the Secretary of Defense.

When President Trump wanted to implement steel and aluminum tariffs, he had a willing servant in Secretary of Commerce Wilbur Ross. However, Secretary of Defense James Mattis resisted. Mattis simply did not understand a key tenet of the Trump Administration: Economic security is also national security. Without vibrant steel and aluminum industries, it will be difficult for America to provide the Pentagon with the kind of weapons it needs to defend the homeland.