I Think I Can Explain Trump's Theory of Trade

Donald Trump likes exports and foreign investment, and laments imports and trade deficits. Most economists find this a baffling bundle of preferences — and the more they know about international trade, the more baffled they are. Never mind the truism that the whole point of exports is to buy imports. Doesn’t Trump know that getting more foreign investment raises trade deficits by definition? How confused can you get?

While I agree that Trump is terribly wrong about international trade, there’s a big difference between being wrong and being confused. While I doubt I’m ready to pass an Ideological Turing Test for Trumpian trade theory, I recently had a weird epiphany on the topic. After said epiphany, I feel capable of articulating roughly what Trump is thinking.

1. Above all, Trump wants the rest of the world to buy as much stuff from the U.S. as possible. He wants the world to buy our current output — and he wants them to buy our assets, too! His dream is piles of dollars flowing into the U.S. from all directions.

2. If piles of dollars flow into the U.S. from all directions, he thinks this will boost U.S. sales and employment.

3. Trump doesn’t know and doesn’t care about the “trade deficit” as economists define it. When he hears “trade deficit,” Trump imagines that U.S. dollars leaving the U.S. exceed U.S. dollars entering the U.S. Foreign investment means U.S. dollars entering the U.S., so on his implicit definition, foreign investment reduces trade deficits.

Why would anyone find this story plausible? Simple: It’s unadorned, old-fashioned Keynesianism. Trump wants to boost aggregate demand. The more money foreigners spend here, the more American business will sell, and the more American workers they’ll hire.

What Trump wants the rest of the world to do for the U.S.

At least in the 1990s, macroeconomics textbooks often explicitly mentioned this idea under the heading of “beggar-thy-neighbor” trade policies. If standard expansionary fiscal and monetary policies are somehow unavailable, countries can “steal” aggregate demand from other countries via protectionism.

If Trump’s real goal is to boost aggregate demand, why doesn’t he just push the Fed for more expansionary monetary policy? He has, but it’s a low priority for him, probably because he dimly realizes that extremely expansionary monetary policy would also raise inflation.

If foreign dollars really poured into the U.S., wouldn’t that also be inflationary? Of course. It would be tantamount to a massive fall in global demand for the dollar. The value of the dollar plummets if and only if the price of stuff in terms of dollars skyrockets. Alas, this is a subtle point. Trump, like most human beings, can with effort connect money supply to inflation. But connecting money demand to inflation, much less trade policy to money demand, is two bridges too far.

Intellectually, then, the best response to the Trumpian theory of trade is:

1. Since the U.S. economy is near full employment and inflation barely under control, raising aggregate demand is currently a bad idea.

2. Even if raising aggregate demand were currently a good idea, expansionary monetary policy is by far the best tool for the job. Trade policy is, at best, a clumsy way to accomplish the same thing with lots of collateral economic and diplomatic damage.

3. More generally: There is never a need for the U.S. to struggle to earn back American dollars from the rest of the world. We can print all of the dollars we want.

4. In fact, America’s best-case scenario is that we can persuade the rest of the world to sell us infinite stuff in exchange for green pieces of paper that we print at near-zero cost.

What, though, is rhetorically the best response to Trumpian trade theory? While I now feel able to translate Trump Thought into textbook econ, I really don’t know how to translate textbook econ into Trump Thought. If you’re up to the task, please help me in the comments.