October 05, 2016
It’s a sad day when the Republican Presidential nominee is closer to the mark on an issue than a major news outlet, but that appears to be the case when it comes to CNN and trade. CNN managed to get badly confused as it confronted Trump’s “myths” with “reality. It rightly criticized the idea that trade is a zero sum game, trade is typically mutually beneficial so that both parties gain, but the situation is still not quite as CNN presents it.
Its myth #1 is that “America is losing money to Mexico, China, and others.” The piece then gives us the “reality,” which it claims is:
“There’s no proof that a trade deficit is bad for an advanced economy like the United States.”
While a trade deficit is not necessarily bad for an advanced country (actually, trade deficits are likely to be worse for advanced countries, in theory fast-growing developing countries should be the ones running deficits), it certainly is bad in a context where an economy is operating below its full employment level of output. The trade deficit means that spending in the United States is creating demand in other countries rather than the United States. In a context of secular stagnation, which many economists believe the U.S. is now experiencing, the trade deficit is making the lack of demand worse than it would otherwise be.
It’s true that the demand lost to a trade deficit could be offset by a larger government budget deficit, but at the moment there is little explicit support in either political party for larger budget deficits. This means that there is nothing to offset the demand lost to trade deficit, therefore the trade deficit means slower growth and higher unemployment.
CNN then attacks Trump’s “myth II,” that “trade with Mexico is a U.S. jobs killer.” It counter this assertion by telling readers:
“About six million American jobs rely on trade with Mexico, according to the U.S. Chamber of Commerce.
“On top of that, many U.S. businesses rely on Mexico. Consider this: for every dollar of goods Mexico sells in the United States, 40 cents of that dollar goes to U.S. businesses that ship parts and products to Mexico.
“America sends more goods to Mexico than it does to China, India, Russia and Brazil combined, according to Carla Hills, a former U.S. trade representative under President George H. W. Bush. All those exports support American jobs.”
It’s actually not clear what any of these points have to do with the time of day. What matters is net trade flows, the fact that six million jobs rely on trade with Mexico provides zero information on net flows. Similarly, it is nice that much of our spending in Mexico pays for items purchased from the U.S., but this is accounted for in the trade deficit. And the comparison of our exports to Mexico with exports to Mars really doesn’t mean anything.
The United States currently has an annual trade deficit with Mexico of more than $60 billion a year. This corresponds to a loss of around 500,000 jobs in the United States. That is the reality.
There is also an issue that the actual and potential shifting of jobs to Mexico can put downward pressure on the wages of manufacturing jobs that remain in the United States.
These are the realities of trade. It’s not clear that Donald Trump has any serious way to address these issues, but he seems to have a better grasp of them than the folks at CNN.
Comments