One of the main themes of Donald Trump’s presidential campaign has been the idea of getting tough with our trading partners. He has attacked President Obama and his predecessors for negotiating bad deals. Trump promises to get tough with the Chinese, Mexicans, and other trading partners and thereby bring jobs back to the United States.
While many working people would agree that recent trade deals have not benefited them, they have good cause to be skeptical about Trump’s get tough promises. Most immediately his vice-presidential pick, Governor Mike Pence, has been a strong supporter of NAFTA and other trade deals. But choosing vice-presidents with differing views certainly has precedents.
More importantly, it is not clear what Trump thinks he is going to do when he gets tough with the Chinese and the other bad guys in his story. It’s true that China and Mexico and many other countries are running trade surpluses with the United States. And it’s also true that these surpluses have cost the jobs of millions of workers. In some cases these workers have been able to find new jobs, generally at much lower pay. However in many cases these workers remain unemployed and end up dropping out of the labor force altogether.
The trade deficit poses an especially severe problem in the context of secular stagnation: a situation in which the economy faces a sustained shortfall in demand. In the years prior to the collapse of the housing bubble most economists did not take the idea of a secular stagnation seriously. Their view was that if we saw a loss of demand due to a trade deficit, we could simply make it up with increased demand from consumption or investment spending.