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How Donald Trump would worsen America’s trade deficit

Trump wants to get tough with America's trading partners. The market reaction to the first debates reveals a big problem for him, however.

Donald Trump reacts during the first presidential debate with Hillary Clinton on Sept. 26 at Hofstra University in Hempstead, N.Y. (Lucas Jackson/Reuters)

Thirty-six hours after the first presidential debate of the general election season, the conventional wisdom has pretty much calcified: Donald Trump started out reasonably well but lacked the stamina to stay engaged in the debate as it wore on, leading to Hillary Clinton cleaning his clock. Both the New York Times’ Jackie Calmes and The Washington Post’s Jim Tankersley argue that Trump’s protectionist rhetoric probably played well with voters. As Tankersley put it:

The first exchange of the first debate of the 2016 general election was Donald Trump’s best moment of the night. The topic was jobs, and Trump’s Democratic opponent, Hillary Clinton, had used it to distill her complicated economic plan into a tight two-minute bundle.
Trump spent almost his entire answer on a single issue, trade, to hammer home a simple theme: I’m for the working Americans who’ve been screwed by globalization; she’s one of the politicians who let them get screwed.

Now, as someone who thinks Trump’s positions on trade are predicated on a Big Lie that is at least a decade out of date, I’m a bit unhappy with this conventional wisdom. I get it — commentators are arguing that regardless of whether it’s true, voters in key swing states will respond to this kind of protectionist message. I’m not entirely convinced of this argument either, but that’s not the point I want to make here.

The point I want to make is that the debate and its aftermath revealed an important truth: Trump’s very existence sabotages his plans for reducing America’s trade deficit.

To understand what I mean, you have to appreciate the following facts:

1. Trump thinks the biggest problem on trade is that other countries undervalue their currencies. This is from Trump’s answer on trade that Tankersley and others thought was so solid:

You look at what China is doing to our country in terms of making our product. They’re devaluing their currency, and there’s nobody in our government to fight them. And we have a very good fight. And we have a winning fight. Because they’re using our country as a piggy bank to rebuild China, and many other countries are doing the same thing.
So we’re losing our good jobs, so many of them. When you look at what’s happening in Mexico, a friend of mine who builds plants said it’s the eighth wonder of the world. They’re building some of the biggest plants anywhere in the world, some of the most sophisticated, some of the best plants. With the United States, as he said, not so much.

This leads us to the next point …

2. Trump’s economic team thinks that the key to fixing America’s overall trade deficit is focusing on the bilateral trade deficits with a few key countries. This is from Trump’s economic plan that he released the day of the debate:

Consider that roughly half of our trade deficit is with just six countries: Canada, China, Germany, Japan, Mexico and South Korea. If we look at the bilateral relationships of America with each of these countries, improvement in our trade balance is clearly achievable through some combination of increased exports and reduced imports, albeit after some tough, smart negotiations — an obvious Trump strength.

Readers should file this under the “there’s no trick to it, it’s just a simple trick!” category of voodoo economics, but we’ll let that slide for the moment and move on to the next point.

3. In the eyes of most observers, Clinton won the debate. Don’t just take my word on this. Prediction markets shifted toward Clinton as the debate wore on. The real post-debate polls showed the same outcome. She won. That happened. Move on.

4. Financial markets responded to Clinton winning the debate in interesting ways. The Mexican peso appreciated more than 2 percent against the dollar. The reason for this is not a mystery. We know the president has enormous power over America’s trade policy, and markets are updating the likelihood of Trump winning and causing a trade war.

Reuters offered up several juicy quotes from market analysts to explain why:

“In a similar way that sterling became the market proxy for Brexit risk, so moves in the Mexican peso and expected volatility of the Mexican peso appear to have become the main market proxy for expressing the probability of a Trump presidency.” . . .
“Both futures and the Mexican peso are accurate indicators of how markets interpreted the debates. Both moved only modestly but both moved in tandem — higher. I believe that investors are pricing in the odds of either candidate winning. Modest positive moves suggest the Clinton campaign both managed expectations and delivered on beating them.”

5. When a currency depreciates in value against the dollar, its trade surplus with the United States will grow. If, say, the Mexican peso falls in value relative to the dollar, Mexican exports to the United States are cheaper while U.S. exports to Mexico are more expensive. People react to changes in prices, so Mexican imports to the United States will surge and exports to Mexico will lessen.

And so we arrive at the problem a President Trump would face. He has argued that one of the biggest trade weapons other countries possess is keeping their currencies undervalued relative to the dollar. But the more that Trump is perceived as having a real chance at winning the election, the more financial markets will push down the value of the peso, South Korean won or Canadian dollar. This will increase America’s trade deficits with these countries.

If you think the “obvious Trump strength” is in “tough, smart negotiations,” that’s great. You’re dreaming, but go and chase your dreams! The thing is, negotiating prowess ain’t gonna move currency markets. The more successful Trump is in getting these countries to reduce their exports to America, the more likely it is that capital will exit those countries. That capital outflow will cause their currencies to depreciate and erase whatever meager gains Trump would make in negotiations.

The only way a President Trump could actually reduce America’s trade deficit is by causing the economy to crash. A recession or depression would undeniably reduce the U.S. appetite for imports. That’s a really stupid way to reduce the trade deficit — but based on how the markets have reacted over the past day or so, it appears to be Trump’s only option if he’s elected.