Trump’s Mercantilist Mess
When US President Donald Trump boasted that trade wars are "easy to win" in March 2018, it was convenient to dismiss the remark as a rhetorical flourish. Yet it is now clear that Trump meant it, because he genuinely believes the bizarre and anachronistic macroeconomic theories underlying his approach.
CAMBRIDGE – When US President Donald Trump quipped in March 2018 that “trade wars are good, and easy to win,” many dismissed his remark as a mostly harmless rhetorical flourish. But was it?
The reason that countries participate in international trade is to get imports – consumer goods, intermediate goods used in production, and capital equipment – in exchange for exports. Framed this way, exports are simply the goods that Americans are willing to part with to acquire something they want or need.
But international trade also boosts, on net, the size of the overall economic pie, because it means that countries can focus on doing whatever they do best, producing goods in areas where they are relatively more productive. According to David Ricardo’s theory of comparative advantage, countries’ relative strengths derive from differences in factor endowments. And, as economists Paul Krugman and Elhanan Helpman showed in the 1980s, countries’ relative strengths are also related to their investments in various areas of specialization.
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