By, now you're likely aware that President Trump believes that the U.S. gets taken advantage of on foreign trade and that he's been tweeting something about a war. If you're more informed than most you know that he's already issued a tariff on foreign solar panels and is planning to add one on foreign steel and aluminum. But what really does this mean? What's a best case and worst-case outcome, etc. We'll I'll boil this down to hopefully easily digestible pieces. First let's look at the total U.S. trade picture. In 2017 here's what happened:
U.S. imported $2.9 trillion
U.S. exported $2.3 trillion
So, the U.S. had a trade deficit of $566 billion last year. Still who cares & what does that mean? It means other countries benefited by trading with the U.S. an average of 24% more than we did. As you're probably aware, the U.S. losing out on foreign trade is anything but new. 1974 was the last year the U.S. didn't have a trade imbalance - which btw, is why you can find a young Donald Trump talking about poor trade deals going back to the late 70's & early 80's. Ok, so know we know that the U.S. gets the short end of the economic trade stick to the tune of 24%. So, now what? There are really two types of trade relationships. "Essential" & "non-essential". Btw, if this sounds new that's ok. It's not taught like this anywhere that I'm aware of unfortunately. So, what's the difference between essential & non-essential?
Essential trade occurs when the goods being exchanged can't be produced by the trading partner. Non-essential trade occurs when the goods being exchanged can and often are being produced by both partners. This is extremely important to understand for knowing what the implications are with President Trump's potential "trade war". Simply put, due to our size, ingenuity, diverse natural resources, etc. there are very few goods the U.S. can't produce itself. In other words, virtually, all of the U.S. trade is "non-essential". So, if we don't really need to trade with other countries why do we? It's generally good economics.
Under healthy trade deals and relationships all partners benefit. In some circumstances the benefits are clear. For countries that are resource limited and have many "essential" goods for their country - it's clear what the benefit is to them. In a situation like the United States it's a lot opaquer. Because we don't have extensive needs, our benefits are almost exclusively economic - if we're going to achieve any benefit. That takes us back to that 24% deficit we're running. If we don't need their stuff why would we take a 24% hit to do so? Now you understand where President Trump is coming from...in part two I'll give you the rest of what you need to understand how this can work - or not - with the President's impending steel and aluminum tariffs.