The current government of the United States has expressed a preference for bilateral trade negotiations. The policy is extremely mercantilist: trade surpluses with specific countries are good; deficits are bad. This is insane, as Adam Smith long ago taught us.
Martin Wolf this week performed a public service by pointing this out to readers. Let us hope that Donald Trump has read Mr Wolf’s column, and that he comes to understand the folly of focusing on bilateral trade balances.
Consider what our national economies would look like if every company was required to balance its sales and purchases with every other one. This would be insanely costly — indeed insane. It is to allow a vastly more complex division of labour that we have money, and so the possibility of balancing the value of incomes against expenditure across the economy as a whole. Trade allows the same thing to happen across borders ….
In a multilateral economy, bilateral balances do not matter. Of course, overall budget constraints still do. But the fact that I run a consistent deficit with my nearest supermarket should be of no concern to me (or it), so long as I do not exhaust my overall resources. ….
The bilateralism now touted by the Trump administration is a delusion. It will not work. But it will do huge damage. It must be buried.
Martin Wolf, “The folly of Donald Trump’s bilateralism in global trade“, Financial Times, 13 March 2017 (gated paywall).