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Looking for a simplified fundamental answer to educate myself, obviously this topic could be the subject of years of study but I'm hoping there's a simple explanation so I can understand the basics as a voter.

The president of the US has started a trade war with China and other countries, saying we're "losing" on trade in these cases. I don't want to get into subjective debate obviously on this site, but rather, I'd like to understand what "fair" trade means from an objective standpoint. If the metric is that we're importing more of their good than they are of ours, that wouldn't seem to make sense because obviously we have a much bigger population and GDP than some of the countries in this situation.

Even if the metric for what's "fair" trade varies between the two major parties, what is/are that/those metric(s)?

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The metric that Donald Trump is using is the trade deficit.

If the metric is that we're importing more of their good than they are of ours, that wouldn't seem to make sense because obviously we have a much bigger population and GDP than some of the countries in this situation.

But the United States have a net trade deficit with the rest of the world in aggregate too. And the rest of the world certainly is bigger than the US.

Beyond that, the US has bilateral trade deficits with China and the European Union, which have larger economies and population. As well as with India, which has a larger population (albeit a smaller economy, as measured by Gross Domestic Product).

The truth is that there is no way to account for population and GDP. Clearly, the rest of the world has more population and GDP than the US alone has. So by that measure (we should have proportionate exports to imports), we should have a trade surplus, as should every other country. But that won't work, since the net balance of trade of all countries needs to be zero mathematically. Since the total needs to be zero over all countries, Trump is saying it should be zero for the US overall and with each of the other countries.

The problem isn't that other countries are smaller and can't import as much. They're also smaller and can't export as much. Those two effects balance, so we could have a zero trade deficit, even with a much smaller country. For example, the US' largest trade surplus is with Hong Kong, a tiny country.

Currency hegemony

As an aspirational goal, it's going to fail without structural changes. It's perfectly feasible for all the countries that are not the currency hegemon to have net trade of zero among themselves. The problem is that the US is the currency hegemon. Because it maintains the global currency, it has to produce a current accounts surplus. A trade deficit is the other side of a current accounts surplus.

Alternatives to a trade deficit would be for the US to give away money or to loan the money. Trump might be willing to live with the loans, but they are harmful to the receiving economy. Trump would be against giving away money for the same reason he's against trade deficits.

The problem is basic math. In order for other countries to use the US dollar as the global currency of trade, they have to obtain it. The normal way to obtain money is to exchange goods or services for it. It is more difficult to exchange services across country borders, so they mostly exchange goods. If they exchange more goods in dollar terms than the US does, there is a trade deficit. If there is not, then they have to spend down their global currency reserves to cover any surplus.

Trump's approach is called the mercantilist perspective. He is trying to maximize the amount of money coming to the US. This kind of perspective made more sense in days of yore when money was gold. So the US would be collecting gold. It makes much less sense now, when money is just a medium of exchange without intrinsic value. It would make more sense to measure trade in terms of goods. The US gets more goods than it gives away, so the US is winning the trade war.

There was a theory that if the US had a weaker currency, that it would export more goods and import less. It didn't work. What happened was that exports fell and imports increased, because people wanted the old value of money. So the trade deficit had to increase to give more money in nominal terms to maintain the value in real terms.

Unless Trump does something to address the underlying issue, the trade deficit will continue. We may import less with his tariffs, but we will export less to make up for it. At the extreme end of responses, the world will pick a new reserve currency. The US would then have a trade surplus, as people will exchange the now unnecessary dollars for goods that they can trade for the new currency. It's unclear though who would take up the role of currency producer.

China doesn't want to be the world's currency producer. Their economy is built around exports. They are in no position to build it around consumption instead.

Europe doesn't seem to be interested either. The Euro area is now bigger than the US. If they were interested, they could be taking over as the currency hegemon now. But they do not produce nearly as much currency account surplus.

Other countries aren't really big enough. Japan would be possible, but it has the same problem as China. It's built around exports rather than consumption.

There have been some suggestions to make a basket of currencies the new reserve currency, but that still puts additional pressure on the currencies in the basket to import more. And they don't seem to want the trade deficits or foreign aid necessary to create a current account surplus. It makes the problem smaller. It doesn't make it go away.

A new currency hegemon though is almost the only way that Trump can get what he thinks he wants. But he hasn't been taking the measures to bring that about unless the trade war gets so bad that Europe, China, and Japan start moving forward with an alternative.

Democrats

Democrats often use the trade deficit as a measure as well. But when they talk about "fair" trade, they mean that other countries should pay the same wages and apply the same regulations as the US does. That is their definition of what "fair" means.

  • The problem isn't that other countries are smaller and can't import as much. They're also smaller and can't export as much. Those two effects balance, so we could have a zero trade deficit, even with a much smaller country. For example, the US' largest trade surplus is with Hong Kong, a tiny country. thanks, that makes everything more clear. – john doe Jun 17 '18 at 0:13
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    "What happened was that exports fell and imports increased, because people wanted the old value of money" - can you clarify what this means? – JonathanReez Jun 17 '18 at 4:20
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    upvoted, however could you cite a source for the democrats definition of "fair" trade. (perhaps a democratic platform plank ?) – BobE Jun 17 '18 at 14:51
  • @johndoe Also note industrialization, hight tech goods and resources like oil and copper contributes a lot for those inbalances. Another point is China is steadly increasing exports for latin america. There's also the exchange influence: if USA currency decreases means goods from here will become cheaper for the rest of the world but imports will become more expensive affecting different industries in different ways. Finally from a corporation point of view why not close a facility in USA and open a new in China if it will be more profitable to made stuff here and export it to USA? – jean Jun 18 '18 at 14:05
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I would argue that for a "healthy" relationship, assuming the rule of law is in place (not a safe assumption with China) the standard should be comparative advantage. When countries engage in such trade that bears directly on their opportunity costs, all participants, even if they hold absolute advantages in production, or none, will consistently have more goods (richer) if they engage in such trade. You can reference this article for the math.

Trade is a global phenomenon that virtually all countries participate in. Even countries that have absolute advantages (i.e. more efficient production processes) in all relevant goods can still profit from trade, as long as they have different opportunity costs. In those cases, there is always at least one good in which another country has a comparative advantage (i.e. lower opportunity costs). This is due to the fact that the opportunity costs of one good are the inverse of those of the alternative goods, so it is impossible to have the lowest opportunity costs for all relevant goods. By specializing in goods with lower opportunity costs the countries involved can increase the overall level of production and then split the additional output according to individually conducted trade negotiations.

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This question is similar to asking "What is fundamentally 'fair' in war?".

The answer is there never has been, and likely never will be, anything that can be considered a canonical answer. In practical terms, "all's fair" that works and cannot be punished.

The best approximation you can get is something resembling general consensus, when a large number of powers meet together and come to an agreement about what kinds of practices are acceptable and what is not. But these are, ultimately, nothing more than the opinions of certain powerful groups. And their motivations in hashing out such an agreement are likely to be driven by self-interest.

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