The president talks NAFTA with the Economist

The Economist interviews President Trump…

It sounds like you’re imagining a pretty big renegotiation of NAFTA. What would a fair NAFTA look like?
Big isn’t a good enough word. Massive.

Huge?
It’s got to be. It’s got to be.

What would it look like? What would a fair NAFTA look like?
No, it’s gotta be. Otherwise we’re terminating NAFTA.

What would a fair NAFTA look like?
I was all set to terminate, you know? And this wasn’t like…this wasn’t a game I was playing. I’m not playing…you know, I wasn’t playing chess or poker or anything else. This was, I was, I’d never even thought about…it’s always the best when you really feel this way. But I was…I had no thought of anything else, and these two guys will tell you, I had no thought of anything else but termination. But because of my relationship with both of them, I said, I would like to give that a try too, that’s fine. I mean, out of respect for them. It would’ve been very disrespectful to Mexico and Canada had I said, “I will not.”

But Mr President, what has to change for you not to withdraw?
We have to be able to make fair deals. Right now the United States has a 70—almost a $70bn trade deficit with Mexico. And it has about a $15bn dollar trade deficit with Canada. The timber coming in from Canada, they’ve been negotiating for 35 years. And it’s been…it’s been terrible for the United States. You know, it’s just, it’s just been terrible. They’ve never been able to make it.

A few random thoughts….

Trade balance figures with individual countries in a multi-country world are absolutely meaningless. A nation can carry a trade imbalance with one country but still have a balance of trade with the world as a whole.

For example, imagine three countries. Country A, Country B and Country C, If A sells only to B, B sells only to C and C sells only to A, every country has a 100 percent trade imbalance with every other country but there is still an aggregate balance of trade.

Trade balance figures on individual commodities like lumber are even more meaningless. Should the US export as many bananas to Costa Rica as it imports from Costa Rica? Come on. Duh.

The US experiences a balance of all accounts. Even when the US has more money going out in trade, it has a huge surplus in foreign investment balancing it. In fact, without that foreign investment, the government would shut down and interest rates would skyrocket. A balance of trade would extinguish that needed foreign investment. Just a reminder of what that balance of payments looks like.

You cannot have a capital account surplus without a trade deficit and the United States absolutely, positively must have a capital account surplus.

In fact, as the holder of the world’s reserve currency, the dollar, there will always be a net inflow of investment which will always result in a trade deficit. The last time the US ‘enjoyed’ a huge trade surplus was in the deepest throes of the Great Depression.

Americans having access to low cost lumber has not been terrible for the United States. That is absurd. If it is bad for Canada to sell the US low cost timber it would be much worse if they just gave it to us for free, huh? What a nightmare, huh?

It deeply troubles me that the POTUS’ understanding of international trade isn’t as clear as that of a below average college freshman during his first week of Introduction to Macroeconomics.