Scott Lincicome on the Trump Trade War

Scott Lincicome is the vice president of general economics and trade at Cato. Scott returns to the program to discuss the past, present, and future of Trump’s trade war, the impact of tariffs on the US consumer, myths about globalization, the state of globalization worldwide, and much more. 

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Read the full episode transcript:

This episode was recorded on March 19th, 2025

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

David Beckworth: Welcome to Macro Musings, where each week we pull back the curtain and take a closer look at the most important macroeconomic issues of the past, present, and future. I am your host, David Beckworth, a senior research fellow with the Mercatus Center at George Mason University, and I’m glad you decided to join us.

Our guest today is Scott Lincicome. Scott is the vice president of general economics and trade at Cato. Scott joins us today to talk about President Trump’s trade war, where it currently stands, what it is aiming to accomplish, and whether it is actually working. Scott, welcome back to the show.

Scott Lincicome: Thanks for having me back.

Beckworth: It’s great to have you on. Now, last time you were on the program, it was in August 2020, and we discussed your amazing work that you’ve done on the China shock. There was a China shock, but how we interpret it, I think, is where the real debate is. You probably know that literature as well as anyone, so I will encourage listeners to go back and check out that episode.

Cato’s Trade Center

Now, today we want to talk about what’s happened more recently. President Trump got reelected, as everyone knows. He’s been in office, and man, he has been on a tear. Scott, I know this is your cup of tea and what you do. In fact, you have an entire center at Cato dedicated to globalization, so tell us about the work that you’re doing there, and then how it has been affected by what Trump is doing.

Lincicome: Sure. Well, I think we, in the trade center, operate on really three parallel tracks. The most relevant right now is rapid response stuff. When a new tariff announcement comes out, or when there’s some big newsworthy event, we want to be involved in the very immediate debate about the facts, the tariff rates, what the trade agreements say, myths and realities of that stuff. As you surely know, and particularly international trade, there’s a lot more myth than reality in a lot of this stuff, not just from political actors, but from the media as well.

The second track is long-term policy analysis. We at Cato will dig into various issues, whether it’s the China shock, or the Defense Production Act, or the history of steel protectionism, you name it. So we’re going to do long research papers on that, and our scholars are working on that long term. 

Then last is this educational aspect with respect to globalization. We, a few years ago, realized that there was a real need out there to get back to the basics on what globalization is. What some of these terms, like trade deficit or comparative advantage actually mean, what the literature says about tariffs, how the World Trade Organization works, all those nuts-and-bolts things. Also trying to hit home to people how much of their daily lives involve globalization and do in ways that nobody ever talks about. We write about food globalization. Probably one of the best examples of globalization is the restaurant down the street, whether it’s the cuisine or the people working there or the silverware, you name it. 

At the same time, other things like video games. We did a little documentary and a piece on video games and digital trade. All these types of parts of our lives that are deeply enmeshed in the global economy greatly benefit from the global economy. Both financially and in terms of our quality of life and things we enjoy and are never, ever discussed. You could not pick up the Wall Street Journal, The Washington Post, anything, and read anything about how wonderful it is that today we can have access to all this fresh fruit and produce and all this stuff, thanks to trade and globalization.

That’s just a broad educational effort. Now, these days, we could use some of that broad stuff on Capitol Hill and in the White House too. That’s not the exact audience we were planning to direct it to, but it seems we need a lot of that there too.

Current State of Trump’s Trade War

Beckworth: You are definitely doing the Lord’s work over at Cato, for sure, especially in this season of trade war and things that are going on. I have to ask, when Trump got elected, did you expect things to move this fast? If I look at the current state of play, let me just run down a quick list, and you can fill in where things I’ve left off, because this is really your specialty. 

He issued the America First Trade Policy Memorandum on Inauguration Day to review trade policy. Set in motion new duties covering nearly half a trillion dollars of US imports during the first two weeks of February. Doubled his February tariff increase on China on March 4. Announced, suspended, reannounced, resuspended 25% tariffs on goods from Canada and Mexico, and then pledged this new reciprocal tariff on April 2. What do they call it? Liberation day is coming. It’s just so much happening and it seems so chaotic, off and on again. Did you expect this?

Lincicome: Yes. I’m going to be a dork and correct you. There’s two other things. There’s two new national security investigations, one related to lumber and wood products of all things.

Beckworth: Oh, wow.

Lincicome: Copper is another one. More tariffs on inputs that we use in other industries, really brilliant strategy. Anyway, back to your main question. I did not expect the sheer breadth of actions. If you pull up a podcast of me from, say, December, my base case was substantial China tariffs on or around day one, but not related to this fentanyl emergency that the president has invoked, national emergency, so that he can impose these additional tariffs as well as the Canada-Mexico tariffs.

I expected it to just happen from the original China tariff action under Section 301, which Biden kept around, much to his discredit, and that seemed to be the most obvious thing. In that sense, we got to the place I thought on China, not the full 60% that Trump promised, but a good chunk. It’s everything else that has really been surprising. 

The invocation of IEEPA, the International Emergency Economic Powers Act, to slap tariffs not just on China and Chinese imports, but all imports from Canada and Mexico, you’re talking almost a trillion dollars’ worth of annual imports. Just as importantly, annual imports that are deeply enmeshed in our own manufacturing supply chains. Our manufacturers have depended on these imports because there’s been free trade in the three countries since the ’90s. Moreover, countries that we’re friendly with, in the case of Mexico, and just downright very close military allies in terms of Canada. Canada is part of our industrial base. The technical definition of the US industrial base includes Canada—and we’re slapping national security tariffs on everything that’s made in Canada. Not just steel and aluminum, we’ve done that before, but everything. That was really surprising. 

The other stuff, copper investigation, lumber investigation, that’s a weird one, but not that surprising. Then I think I have been surprised that they’re so committed to this reciprocal tariff policy. April 2nd is right around the corner, and as we get closer, it’s increasingly clear that they’re going to do something pretty big on that day. It’s not just going to be another memo. If it is full-scale investigations or even tariffs, that’s a bit surprising. If you talk to anybody in the biz, particularly customs lawyers, practitioners, it is an extremely difficult process, fraught with practical, legal, and economic problems. We can get into that, but just, again, it’s surprising that they’re really going to go down this road.

I think it gives us an indication that this time around, there’s less of a check on the president’s impulses when it comes to trade than there was last time around. Last time around, you had Steven Mnuchin and Gary Cohn, and even guys like Bob Lighthizer, who’s pretty protectionist, they were able to restrain some of the president’s impulses. It just doesn’t seem like there’s nearly that much restraint this time around.

Beckworth: Yes, there’s so much there. Just to think through everything that’s happened, and there’s this index I know both of us track called the Economic Policy Uncertainty Index. It measures how uncertain it’s being perceived, and it is at historic highs, I believe. Don’t we see evidence for investment spending declining and things like that happening too?

Lincicome: There was a good study from some Federal Reserve economists in 2020, I believe. They looked at the peak trade war period of 2018/2019, when you may recall back then—I have PTSD from that period—where almost every other day there was some sort of China tariff news. During that period, trade policy uncertainty, which is a subset of the Economic Policy Uncertainty Index you’re talking about, skyrocketed, highest level ever.

The Fed economists looked at that period and found that it depressed investment by somewhere between $20 and $40 billion in 2018 alone. The bad news is that we’ve almost tripled the level of trade policy uncertainty in the last few weeks than what we had the last time around. Now it’s not a one-to-one relationship.

Beckworth: Sure.

Lincicome: This is a shorter period of time. If you look at a lot of the business surveys, consumer sentiment surveys, and tons of headlines, there’s clearly a palpable sense of trepidation among the folks in the real economy, not just the stock market. That’s done bad things every time Trump talks about tariffs. Folks that are actually investing, building, hiring, they’re holding back a bit.

They’re doing the opposite of holding back; they’re stockpiling—if you’re trying to get ahead, which has its own cost, as you know. There’s all sorts of weird, wonky behavior. There’s been this rush of gold imports, which is totally screwing up the Atlanta Fed’s GDPNow. This is all trade war–related stuff and it’s all uncertainty-related stuff.

Beckworth: Yes. To be clear, Trump, when he ran for office, did not say there would be this transition period, which now they’re saying. In fact, I believe Trump even said, “Well, I’m not ruling out a recession.” That was not in the cards during the election. 

Lincicome: I’ll say two things on that. One is I presciently noted in October last year in The Atlantic that this uncertainty issue was a real risk with a Trump win because of US law. We really need to put some of the blame for a lot of this chaos on Congress. Congress has, through decades and through a series of different laws, delegated massive amounts of its tariff power under the Constitution to the president. It’s done it in these very vague ways that basically put a little light switch in the Oval Office that says “tariff, no tariff.” Most presidents have acted with restraint in this regard. That makes sense. 

The president, having foreign policy obligations, a team of economic advisers, and having a national constituency, is supposed to be, theoretically, the least protectionist guy in the room. Trump blew up that consensus. Congress deserves a lot of the credit because we’ve now known of these risks since 2018. Trump went down this road. The court since said, “You know what, the law is the law. It’s not too broad a delegation.” Congress did nothing to stop it. There were a lot of reform proposals in the first Trump term, during the Biden years. Nobody did anything. 

That is one of the reasons why you could see this uncertainty risk from a mile away. Even a dummy like me could see there’s this potential risk out there for this big problem. The other big point in what you said that I think is really valuable is the rhetoric from Trump and Trump allies has really dramatically changed from tariffs are costless. They’re paid by foreigners. They don’t raise prices. They’re going to generate an economic boom, blah-blidy-blah, to, like you said, there might be an adjustment period.

Scott Bessent’s out there saying cheap stuff is not part of the American dream. Others are saying that high prices are actually good, because they’re signaling an investment opportunity. That even the transition period stuff, it’s a bit more honest, that always leads to the question that I always ask, transition to what exactly? What are we going to have in a high-tariff environment? That we know.

We know from the economics literature, dozens of studies from 150 different countries, and it’s lower growth. It’s not the end of the world, but it’s lower growth. It’s less dynamism and, quite frankly, a smaller manufacturing sector, not a bigger one, given how global manufacturing is. Yes, I guess it’s refreshing that they’re being a bit more honest, but it shouldn’t give us a lot of hope that we’re getting to a good policy place.

Beckworth: I guess I’m not sure that they were expecting it to be this tumultuous themselves. Maybe they were true believers. They could do trade policy easy. They didn’t realize the stock market would go down 10%, $5 trillion, that surveys like you mentioned are showing people are more pessimistic, higher prices for households. You mentioned earlier that many typical Americans don’t appreciate the role globalization plays in their daily lives. I think we’re about to find out. 

Trade War Strategy

Let me circle back again to the strategy of the trade war. Listeners, we’ll get to the merits of the trade war maybe more theoretically, or the arguments for and against it later. Let’s talk about the strategy here. As you mentioned, the justification has changed. That’s an indisputable fact. Long list of things you went through. What has been told to me by smart people is the real reason for this was to be a negotiating tool to get the dollar value down and the burden of being the reserve currency of the world.

The US has this wonderful privilege. People hold our debt. They want to hold our debt. It drives up the value of the dollar. It makes our domestic industries less competitive. Let’s level the playing field. The people who promoted this, including Stephen Miran, who’s a two-time guest on this podcast, I consider him a friend of the show, I’m not sure this is the vision he had. He’s written a paper. What is your sense? Is this what people signed up to do when they signed up for Team Trump?

Lincicome: Yes. I am highly skeptical that they signed up for this. I think one of the indications that this is not going according to the technocrats’ plans is the fact that if you look at the US trade policy statement that was just issued—US trade representative issues an annual trade policy of the United States document—it’s very focused on China. It’s not about IEEPA and fentanyl and reciprocity and all these things.

Now, there’s some stuff in there about negotiating better market access and the need for tariffs as a negotiating tool. That’s fine. That’s a far, far cry from this chaotic tariffs on, tariffs off Canada, Mexico, Canada, not just they’re a 51st state, but they’re a terrible nation, or whatever Trump said yesterday about this. That’s clearly a divergence between what some of the strategists said and what’s actually happening.

I think that stems from the fact that there’s Trump and I think Peter Navarro who have their own ideas about this stuff. Then there’s everybody else: Bessent and Lutnick and Stephen Miran and Jamieson Greer at USTR. They see a more orderly approach, a gradual ratcheting up of tariffs and everything. We can we can discuss the economics of that, but that’s certainly not what we’re getting.

Beckworth: Right.

Lincicome: Then the reciprocity stuff also doesn’t make a lot of sense in that regard because reciprocity in theory could actually lead to lower tariffs in certain cases and runs into a lot of practical issues that, again, I don’t think somebody who’s trying to negotiate a weaker dollar is probably not going down the reciprocity route.

Beckworth: Well, we’ve talked about some of the harm that’s being created by this. Again, just to reiterate this point, because I think it’s important, the stock market’s down. There’s policy uncertainty. That’s upstream. That means businesses aren’t building as much. They’re holding back, holding cash or maybe inventory. That could lead to job losses. It could lead to higher prices, the grocery store.

In fact, I’ve been thinking about buying a new zero-turn mower, and I’m like, “I got to get on that because I know it’s going to get expensive.” Just a very practical level. Things are going to change if this doesn’t stop. I guess my hope going into this, Scott, was that the market would discipline this impulse. Apparently not yet.

Lincicome: Yes. In some sense, there is a brilliance to the madness just in two ways. One is that the vast majority of American voters are going to give Trump a lot of leeway early on in his presidency. They’re still going to blame Biden for higher prices. If the stock market were to crash early—a lot of folks are somewhat disconnected from all this—aren’t going to aren’t going to blame Trump so much. By putting tariffs before tax reform—extending the Trump tax cuts, I think that’s their big prize—it somewhat neuters Congress and potentially gives them, Congress, a revenue source to point to when they’re trying to make the budget reconciliation numbers work. 

I can see why they’re willing to withstand some of this. At the same time, as spring rolls into summer and as voters start seeing tariff announcements from retailers—you’re actually seeing some of these already, and there’s construction materials. Manufacturers in the United States have sent out a lot of notices to contractors saying the price of aluminum siding is going up, the price of these other construction materials, because of the tariffs. Now, as that trickles into other things that we notice every day, and if the stock market stays depressed or even goes down even more, if there’s more hostility, this reciprocal tariff thing, more Mexico, Canada stuff, I think that along with the market reaction, might be enough to get things to pull back in the White House a bit. We’re not there yet.

Beckworth: Time is on our side is the great hope, I guess, at this point.

Lincicome: Well, there are rumors that the more level-headed White House officials, part of their strategy is to delay, delay, delay to try to push out these investigations, push out this reciprocal report. Try to get this stuff pushed down the road so that investors have some time to do what they need to do, but also that Congress can get tax reform done and other things before things get too hairy. I got to say, I was relatively sanguine in the fall about all this stuff. I thought, certainly there was going to get some tariffs, but I didn’t see what it looks like is now in the cards. I thought it would be just China plus a little other stuff.

Break in the Globalization Trend

Beckworth: I was going to ask you this question later, but I think it’s appropriate now. Is the long arc of history bending toward more globalization and therefore, there will be an adjustment? People will see this experience as an experiment, and they’ll tell Trump, no, this is enough. We enjoyed integration with the world. You get that’s the sense where this will end up. Is it possible to have a true break in the trend toward more globalization?

Lincicome: I’m still somewhat optimistic simply because we do know generally what’s going to happen here. We are going to have higher prices. We are going to see depressed manufacturing output. It might go up, but it just won’t be going up as much. I think there will be other tangible harms that we can learn from this, along with consumer reaction and market reaction, the rest. In the long term, I do think the pendulum will swing back. Also, I think politics swings and it does seem like some of the populist insanity might be dying a bit.

In the meantime, I think a lot of damage can be done. I think where I’m least optimistic is with respect to the global trading system, the World Trade Organization, that kind of stuff. If you had asked me at the start of the Biden era if we were going to get a bit more back on track with the WTO, I would have said yes. I would have said some of the easiest things Joe Biden and his internationalist colleagues in the White House could do is reengage at the WTO. They didn’t. In fact, they doubled down on some of the worst Trump administration stuff.

They pursued deals outside of typical trade rules that were just completely inconsistent with the principles in the WTO and in some of our trade agreements. Doing that along with now what Trump’s proposing and completely ignoring that you’re not supposed to abuse national security like this. This whole reciprocal thing is just not how WTO system works. I think that, along with the continued inability or refusal, I should really say, to allow the WTO’s dispute settlement system, the appellate body to continue to function, that’s been blocked for years, all that kind of stuff, it does seem like it’s tough times ahead for that.

I’ll go back to some optimism. We’ve had a bunch of tariffs already imposed under the first Trump administration. We’ve had a bunch of additional tariffs imposed under the Biden years, and yet in 2024, inflation-adjusted goods imports into the United States were at record highs. There is a demand among American businesses and consumers for imported stuff and for services abroad, for being engaged in the global economy.

I think that the tariffs can do damage, but I don’t think they can change that. I don’t think we’re going back, in other words, to a world like when I was a kid, when fresh produce was seasonal, and the occasional avocado was like, “Oh, look at this, it’s an avocado, it’s amazing. Our cars stink,” that kind of stuff. I don’t think we’re going back to that. I think the appetite is too strong. We’re all very spoiled by all this wonderful global stuff.

Beckworth: Well, that’s good to hear. I know that we are both friends with and admire Doug Irwin and his work on trade. He has a great book, Clashing over Commerce: A History of US Trade Policy. I encourage listeners to get a copy. Fair warning, it’s a big book, but it’s a readable history of trade policy. He goes through what he calls three stages of trade policy in the US. Stage one, he calls the revenue stage, 1763 to 1865, basically tariff revenues to fund the government. Stage two was restrictions, so Civil War up until the 1930s. Republicans were a big part of that story. They wanted to protect manufacturing.

Then finally, the most recent stage was reciprocity, 1932 to—in fact, I’m not sure when I would end this period. I guess you did paint a very positive, long arc of history story, which I agree with you, because I think it’s a natural order. When Adam Smith wrote Wealth of Nations, he wasn’t prescribing something, he was describing what he saw. I think the natural order of man is to specialize, to let the market grow. That seems like we would at some point get back to that. In the meantime, are we in a stage four? Doug Irwin’s book ends with stage three, and if we are in a stage four, did it end in 2016, 2020, ’24? How would you put that together?

Lincicome: Well, two things. I think the rest of the world is still squarely in the reciprocity stage, and maybe I should add that to my optimistic point. I wrote an essay on this for our globalization book that was part of our project. Countries outside of the United States are still engaging at the WTO. They are still signing free trade agreements under the traditional reciprocal trade model, not the Trump administration reciprocity model. Global supply chains continue to proliferate, and I don’t think those countries are going to give up on the system.

In the United States, I think we have entered more of a—if I’m trying to keep in the R’s, realpolitik—where politics and security and geopolitics are driving the bus far more than economics or an internationalist foreign policy. I wouldn’t call it straight up isolationism, but it’s far more transactional, and it is much more based on the guy in the White House right now and his views on the world, very zero-sum.

I think consensus in the American foreign policy establishment that China is an existential threat, and we need to retrench and need to have more control over supply chains. Then I think the political consensus in Washington, which is really important, that populist international economic policy, protectionism basically, manufacturing-heavy, wins elections. Now, I can disagree with some of that in the weeds.

I think the political consensus on the left and the right, Democrats and Republicans, is that if you want to win very important states in the industrial Midwest, you need to be protectionist. You need to embrace this stuff, particularly with respect to China, but on other stuff too. I think those things argue for more of a protectionist, transactionalist geopolitical-aligned trade policy.

Beckworth: All right. We are in a fourth stage, realpolitik stage, and I don’t know, do you want to give a forecast for how long the stage is going to last—a decade, 20 years?

Lincicome: It’s hard. I think it lasts as long as Donald Trump is, or his worldview is, as powerful it is within the Republican Party. Republicans, when they’re not talking about tariffs, still sound like free marketers. Even with tariffs, they’ll say things like, “Well, I don’t really like this approach, but I support the president,” or whatever. If we’re several years down the road and say the Trump wing of the party, because this stuff hasn’t worked or the economy’s not great, or who knows what else, let’s say the Trump wing of the party is on the outs, there’s more of a swing toward a more Reaganite party, maybe it ends that quickly. 

If that part of the party continues to be in charge, I think that will push the Democrats to stay sort of where they are in the kind of a Dick Gephardt, Chuck Schumer model. Even though Democratic voters love trade and globalization, we have polling on this, some of it’s because they don’t like Trump, but a lot of it is just because they’re global elites. Even with that, I think that political consensus that you need to win these industrial Midwest states, that’ll keep us in this for a while longer. Man, there’s a lot of uncertainty baked into everything.

Beckworth: It’s a dangerous business to be a forecaster, so I put you on the spot. Thank you for playing the game, Scott. Let’s step back. We’ve been talking about where we are. Is this part of some great strategy? Is Trump really wheeling and dealing based on some plan or not? Is this a new phase in history of trade policy?

Bilateral Trade Deficit View

Let’s step back and just assess the merits of Trump’s views. So, more on the theoretical side. I’m going to begin with a real simple one. That is, why is Trump’s fixation on bilateral trade deficit, the deficit between the US and Canada—let’s use that because that seems to be his focus right now—why is that bilateral trade deficit perspective wrong?

Lincicome: There’s two very big reasons. The first and the simplest is that there’s more than two countries in the world. You can have a situation where, let’s say there are three countries in the world and they each have $100 million dollar trade deficits with each other, but have overall balanced trade. Because of that alone, there is the clear risk that a bilateral trade balance tells you nothing about your overall trade balance.

The second big reason is global supply chains. Global supply chains have really made bilateral trade deficits, which were already questionable, even more so because products are no longer made in one place. Even the most rudimentary product—for our globalization project, we made a t-shirt and it actually included American cotton. Then that was flown down to Central America and was then produced in two different Central American countries.

Now, when that product is imported into the United States from Guatemala, the full value of the product counts against our trade balance with Guatemala. Even though the value add, the economic activity embedded in that shirt comes from several different countries and includes a bunch of services too. Because there’s tons of services embedded in manufactured goods that we never even talk about, particularly software these days with smart appliances and all that jazz.

Because of that, economists have looked at the difference between gross trade balances, which is what everybody looks at, what Trump talks about, what we see in the news, and value-added trade balances and found radical changes. For the United States in particular, many of our biggest trade deficits shrink. A couple even flip over into surplus when you look at trade from value-added perspective. That doesn’t even get into the services and all the rest.

Those two things alone give us real reason to just not expect bilateral trade balances to tell us much about the trading relationship. What they can tell us is the volume and value of goods crossing the border each way, but they’re not going to give you a lot of economic information embedded in there. They’re not going to tell you about a lot of tariffs. They’re not going to tell you about, again, all this value, the economic value in that. Then, of course, that doesn’t even get into the macro issue of trade balances overall and what those really tell us about an economy.

That gets to the other big point. You can forcibly eliminate a trade balance with a certain country by banning all imports. Your overall trade balance isn’t going to change at all because that’s driven by savings and investment and not by trade measures, and it’s going to do bad things to your exports as well. At the end of the day, it’s just not going to work. For all those reasons, the vast majority of economists and trade experts say we shouldn’t be using trade balances and particularly bilateral trade balances as some sort of scoreboard for trade policy. But of course, Trump does.

Beckworth: Yes. I’m going to hold up here, this is my iPhone, and this probably counted toward our trade deficit with China, and your point is the actual value that was created in China is a small, small part of this expensive price on this phone. We forget that all the marketing, all the design, all the engineering done in the US goes to China, and then it comes [back]. That value added, I think, is such a huge point.

Another thing, though, is just the point of comparative advantage. We don’t want to avoid trade deficit. It makes sense to specialize. We specialize in our homes, in our towns, between states in the US, and then between countries. It doesn’t make sense. Even if we’re better at doing everything, we don’t have the time to do everything. We’ve got to specialize. I don’t make my own clothes. I didn’t make my own car. I didn’t make this laptop. A lot of the food I don’t make anymore, I outsource that. Life is better. Life is better. I run a persistent trade deficit with my grocery store. And you know what? I love it.

Lincicome: Yes. Two big points on what you just said there. First, going back to your iPhone example, the other big point that’s embedded in this global supply chain issue is that our trade balances don’t at all consider American companies’ overseas sales that are generated from goods made abroad. Let’s go back to the iPhone. Apple makes a lot of money selling iPhones made in China to people in China. That money comes back to the United States. It comes to Apple that Apple can spend on research and design and a little bit of manufacturing in the United States. All this great economic activity for the United States.

Of course, our trade balance tells us none of that either. Again, when economists look at this stuff, they find dramatically narrower imbalances in this kind of economic relationship than what we see from a gross goods trade balance. Speaking of gross goods trade balances, so the other big point, this comparative advantage issue is huge, especially when you start breaking down bilateral trade balances, as a lot of protectionists do, into certain products. You will hear some economic nationalist types talk about how we have a trade deficit in advanced manufactured products.

Now, they never mention that a lot of those advanced manufactured products are inputs that our own manufacturers are using to make other technology products that they’re selling in the United States. That’s going to make the trade balance all weird. They’re not telling you that a company like Google or Amazon is going to be importing those things to build server farms for AI or to sell streaming sticks to consumers. Tons of economic activity that you can’t see, and then they don’t notice that you can have expanding trade balances in things like advanced goods or automotive goods, but also have big exports of those things too, indicating that you actually have a comparative advantage in certain aspects of that.

When you slice and dice these things, it gets really messy, and I think the most absurd example I’ve seen recently, there’s been a lot of serious concern from the protectionist right about our agricultural trade deficit. All of a sudden, we have an agricultural trade deficit. When you dig into this, you realize that it’s driven by two big things. First, Americans’ insatiable appetite for fresh produce, avocados and berries in particular, things that are just not grown in the United States, particularly off season. Huge chunk of our terrible trade deficit and agricultural stuff is all this wonderful fruit and vegetables that we just don’t grow in the United States.

Then the other big one is beer and other alcohol. If you remove alcohol—which again, we like Mexican beers. We like tequila. Tequila is really hot right now. We like Scotch. These things are things that you can only get in these certain countries. If you eliminate that, all of a sudden, our agricultural trade deficit goes to a trade surplus and, of course, our exports of soybeans and all this other stuff is going up. For those of you in the audience—I’ll look straight in the camera—anytime you see somebody bring up a bilateral trade balance in a particular product as a sign of the failure of American trade policy, you can stop listening to them.

Beckworth: Very nice. Now, speaking of trade deficits, two other points, one that you brought up earlier, one is what actually drives the trade deficit fundamentally with a country? I want to come back to that. It’s really a financing, savings, investment question. Let’s come back to that. 

Also, let’s just say for the sake of argument, Trump could eliminate the trade deficit. Let’s say he could. Again, he can’t because of this deeper issue we’ll come back to in a minute. If he could, would not most of the jobs he would bring back be lower paying? Now, I know there’s a few chip jobs, maybe there’s some things, but on balance, the whole point of trade is we outsource lower-paying jobs, and we go up higher on the value-added chain in the US, or am I mistaken there?

Lincicome: No, I think that’s right. Now, not to be too much of a nitpicker, but you could theoretically imagine a world in which the trade deficit disappears because we start exporting tons of these high-value manufacturers. That’s what you’ll hear a lot. That’s the dream. In reality, a trade deficit that’s eliminated will most likely come from import restrictions and capital restrictions. The import restrictions and capital restrictions are going to force finite resources in the United States to be devoted to a lot of stuff that, like you said, is stuff that Americans don’t want to make and don’t have a comparative advantage in making.

Apparel manufacturing is a big one, right? There are still some apparel-making jobs in the United States. Look, they pay $11 an hour. You can make $30 an hour today working at Costco. Or you can go work at a t-shirt factory for $11. Gee, what are the workers going to do, right? There are several examples of this, this idea that all manufacturing is good jobs. All of it is worth protecting and worth massive amounts of government restrictions on economic activity. Because again, you’d need capital flows too. We’ll talk about that in a sec. Capital restrictions as well to engineer this closed economy.

A closed economy is going to need to make a lot of stuff that we don’t make much. We don’t make it, not because of nefarious foreigners, but we don’t make it just because we have better opportunities for our own time and for our investment dollars, right? Yes, you certainly can get some higher value-added manufacturing. You mentioned chips, aerospace, that kind of stuff. You’re going to get a lot of junky stuff too and impose a lot of costs along the way.

Beckworth: On a practical level, what he could pull back would most likely be lower-paying jobs if he were in fact successful. For all the reasons we talked about earlier, highly unlikely would even get that in place.

Lincicome: We should say lower paying on a real level, right? Because the other thing is, yes, I guess you could—not manufacture, pun intended—but you can generate higher nominal wages, but you’re going to make everything more expensive, right? At the end of the day, your real quality of life, your living standards will be lower.

Beckworth: All right. Let’s get to this issue and I’m glad you’re here to explain it because this is what you do for a living. The underlying reason we have these trade balances is not just about some country taking advantage of another country. It’s fundamentally about the flow of capital or finance across borders and that in turn leads to the trade balance. Explain that to our audience.

Lincicome: Yes. I think the easiest way to think about it is that a trade balance reflects an imbalance in savings and investment, savings and spending in a country. A country, on net, so millions of people in the country, financial institutions, companies, the government, on net, a company that saves more than it spends will have capital that it needs to invest somewhere and that capital is going to flow to countries that have the opposite situation. They spend more than they save.

Now when you have that situation in the United States, we spend more than we save for all sorts of reasons, and we get to that in a sec, and thus we import capital and we have a trade deficit, right? Effectively, investors need dollars to invest in the United States. They get those dollars by selling us stuff. We give them our dollars and it comes back. It’s those imbalances that drive our trade balances. Those imbalances in turn are not driven by trade policy. They’re driven by big macroeconomic things. Some of them are not even policy things.

You can have a country that just is very young and when people are young, their best working years are in front of them. They’re buying a house. They’re doing a lot of things that involve a lot more spending than saving because they’re going to make that up in the long run. And then you might have cultural biases toward spending over saving, those kinds of things. This has nothing to do with policy and you could end up with trade deficits or trade surpluses depending on how those things work out.

Older societies do the exact opposite, right? They save more than they spend, right? Of course, policy though weighs in too, but it’s not the type of policies we think about. It’s entitlement policy and tax policy that might encourage savings over consumption. Entitlement policy encourages consumption over savings, right? You have all these big macroeconomic issues along with those noneconomic issues that drive these big imbalances.

Throw in, in the United States, the dollar’s role as the reserve currency and that adds to this, right? Because people want dollars. They want them not to even invest. They just want to have a safe haven because dollars are a relatively safe asset. Or they need dollars just to do business. A lot of trade is conducted in dollar-denominated form. The dollar’s role as a reserve currency is demand for dollars. That increases the value of the dollar because there’s more demand for it. A stronger dollar tends to mean lower exports, more imports and that again feeds this trade balance.

At the end of the day, the way I try to explain it is the trade balance is not a cause of bad things. It does not cause unemployment and all this kind of stuff. It’s a symptom of these underlying macro issues and you can only decide whether a trade deficit is good or bad by investigating those policies, right? You can have very benign trade deficits. In the United States, most of our trade deficit is thought of as being benign. Most people think the dollar’s role as a reserve currency is a good thing, right? It’s an exorbitant privilege point, right?

Believe it or not, we’re still a relatively young population compared to a lot of the developed world. We have a pretty strong safety net as well, particularly for old age entitlements. And we have a culture, we just like to spend money as well, right? Especially when you look at things like credit card debt or household debt and corporate debt, these things aren’t at levels that are historically high and causing problems. In general, our trade deficit is no big deal.

Now, you can envision a country that the capital that’s coming into the country is very poorly invested. The type of spending that’s going on isn’t on home mortgages; it’s on just flat screen TVs or really immediate consumption. Then it’s a problem. That’s just not generally what’s going on. The only area where you can actually say, okay, that’s a problem in terms of spending and saving and the imbalance is in the government itself, this twin deficits issue.

There’s a good amount of literature that says countries where you have a government that spends more than it takes in in revenue, that can create a trade deficit for the macro reasons I’ve just talked about. Yes, I think among most folks, especially our colleagues, right, but even on the left as well, there’s a lot of recognition that our government needs to get our fiscal house in order. 

Final point, I would note that very few of the trade deficit hawks out there ever bring up the budget deficit as something that we can fix. They always want tariffs or capital controls. They never say, maybe we could stop spending so darn much without accompanying revenue.

Beckworth: Right. Get to the source of the problem as opposed to a symptom. Just to reiterate what you said, I like to think of a country as a person just to explain this point. They have access to credit. They got credit cards, maybe a home equity line of credit. The only reason they do is because they’re a trustworthy investment. Someone outside in the bank, somebody out there who has funds wants to go and put credit into your account. You’re going to take that and you’re going to spend and you’re going to live beyond your means. You’re living beyond your means.

Now, again, the question is, how do you spend that? You just mentioned by most metrics, we’re not building up excessive amounts of debts in the private sector. The only area where we’re concerned is the public sector one. This is a nice segue into our friend Stephen Miran’s arguments for dealing with dollar dominance. He sees this fact that we do provide financial assets to the world. In fact, let me just mention this briefly. We talk about Silicon Valley being one of our comparative advantages, right? Maybe it’s more intellectual property we’re exporting as we talked about earlier with the phone.

New York City is also a place of comparative advantage. We export financial assets. We’re really good. It’s something we should be proud of. In fact, I put a chart on Twitter and you responded to somebody who didn’t like it. We export an amazing amount of financial assets to the rest of the world. We don’t want to recognize that. It seems really frustrating.

Lincicome: It is. You definitely hit on a point that I should emphasize and that I did not mention, much to my discredit. One of the reasons we run a trade deficit is because we are such an attractive investment destination. If you look at the capital flows, we are the world’s top destination for foreign direct investment. We have the world’s biggest and most liquid capital markets and until very recently, had a booming stock market. For better or worse, we have high and increasing real estate value. Oh, and by the way, we have pretty darn good economic growth too, again, compared to the developed world.

These are all things that if you’re an investor abroad and you have dollars, are you going to buy an American-made toaster or are you going to invest in the stock market? Are you going to invest in Silicon Valley? All these great investment opportunities that are good for you and, by the way, are good for the recipients of that investment. There is this weird notion among a lot of nationalists that the trade deficit, dollar for dollar, is a debt that we must repay and some of that is true, right? You can say treasury debt, right?

I, you, we have a bit of an issue with that. The vast majority of it is either debt that, unless you’re an investor, an employee or a manager of a certain company—so corporate debt, you don’t have any obligation. It’s stuff that isn’t debt at all. It’s investment in companies or in the stock market. A ton of the capital flows, I think it’s about a third or a quarter of all of these foreign capital flows are going into the portfolio investment, just stocks, right?

The chart that I responded on Twitter to is that if you actually look at the share of US assets owned by foreigners—so that’s portfolio investment, treasury debt, all these different things—it’s totally flat. Even though in a nominal way, it’s increased, right? If you see a nominal chart of foreign ownership of U.S. assets, ooh, it’s gone up. It’s now trillions of dollars. If you look at the share, it’s actually flat. Why? Because those assets have appreciated. My home has gotten more expensive. American-owned equities have gotten more—the pie is getting bigger.

If the pie is getting bigger, the fact that foreigners have a slightly bigger slice actually tells us nothing, right? In fact, the argument is that those foreigners’ investments are actually boosting the value of those equities or of the assets or the companies. All this is actually good. Generally, the literature shows this, right? Even foreign direct investment that is just a pure M&A deal, no new greenfield investment, even that has been shown to have benefits for the acquired company in the United States, for the surrounding community. Generally these are productive investments, not some sort of terrible debt that we’re going to owe the Canadians or whatever.

Beckworth: Right. Again, it’s the outside world bringing their funds to us and investing in us. Then we in turn have these funds and we go buy goods from the world. We’ve got to keep that causality, number one, in mind. Secondly, again, it’s a comparative advantage. I say, let’s lean into. If the president and others want to build comparative advantage in certain industries, why don’t we recognize the ones we already have?

Lincicome: Yes. There’s an odd demand or affinity for tangible things over intangible things, right? We want toaster factories, not AI companies. Quite frankly, outside of the pure national security context, right, outside of building tanks and planes and laser-guided missiles and all that kind of stuff—which, look, that’s defense procurement. It’s a very different supply chain than a toaster factory or a t-shirt factory, right? That’s just nonsense. In fact, even in the defense space, so much of modern warfare is going to be related to AI and cyber warfare.

I want us to have the best technology companies in the world, even if they’re just making AI and software and that kind of stuff, because that stuff is really, really, really going to matter in the future from a defense perspective too. This odd blind preference for physical things and the production of physical things over the production of intangible things, it doesn’t make a ton of sense.

Comparative Advantage

Beckworth: Yes, absolutely. Again, circling back to Stephen Miran, his paper, he makes this argument—I’m going to come here in the last few minutes of our conversation—that this comparative advantage, I think he would recognize it. In fact, he’s a product of it. He’s from Wall Street. This comparative advantage has become so pronounced that we are sending too many resources to Wall Street. We are hollowing out the manufacturing base. We just got to add a little balance.

Maybe he would say, yes, okay, I acknowledge Scott and David that this is a good thing, but we need a little perspective, a little balance. I think this argument goes back to what you’ve argued for a long time. It’s in your China shock response. Manufacturing is at an all-time high in the U.S. for starters. They’re talking about employment, to be clear, employment. I think you’ve shown this many times, this graph where the manufacturing employment as a percentage of total employment was declining long before globalization, right?

Lincicome: Right, since 1950s. It’s happening everywhere. Even China today is shedding millions of manufacturing jobs. They have this massive manufacturing workforce, right? This is driven by, again, big seismic things that have very little to do with trade policy or even trade—productivity gains, consumer tastes. That’s a big one, right? Bob Lawrence over at the Peterson Institute has written a ton on this, showing that there’s a really strong connection between wealth and our consumption basket and manufacturing share.

In general, as we get rich, we spend more of our money on services than we do on goods, which makes intuitive sense, right? You only need one refrigerator, maybe two if you have a garage fridge. You only need one or two cars and so you return your extra income and you buy services. You get a massage. You go on a vacation, that kind of stuff. That has a really close correlation with manufacturing share of the economy and workforce as well—manufacturing workforce as a share of the workforce.

Again, these are things that have nothing to do with trade policy or trade flows, and they’re not bad things. Because if you’re still producing tons of stuff just with not a lot of workers and you’re producing the good stuff and you’re not producing the low-paying, labor-intensive stuff like t-shirts, that’s a good economy. I think there is an argument to be made that we need to focus on our defense supply chains and defense procurement and that there may be a role for probably not tariffs, but “Buy American” rules and subsidies and this type of stuff to really shore up these defense supply chains.

Again, that’s just light years away from this idea that we’re going to manage the dollar to boost manufacturing and all that kind of stuff. I think the other really big important point is that it ignores that most American workers don’t want to work in manufacturing. They want to work on Wall Street or at a tech company or whatever. We still have hundreds of thousands of manufacturing job openings right now. If you talk to manufacturers, if you look at the Fed surveys, inability to find workers is like number one. Well, it was until tariffs. Now tariffs are number one.

Workforce issues are really high on the list and you combine that with the deportations and the immigration restrictions. I would much prefer a very focused manufacturing sector that focuses on the important stuff and instead of just trying to do this reverse bank shot currency move with a bunch of tariffs that somehow takes people who used to be working on Wall Street and puts them in a toaster factory. It just doesn’t make a lot of sense to me, right? These guys, it doesn’t seem that they have a lot of acknowledgement of these realities.

Beckworth: Absolutely, and I would note—and we’ll provide links to your work on the China shock—I think there’s similar responses there we could say to this argument and that to the extent this has been a factor and to the extent there was a China shock, the issue wasn’t the shock itself. The issue wasn’t Wall Street having this advantage. The issue was labor mobility in the US. Why did people in certain towns stay there and not move to other parts of the country that were growing? There’s more fundamental domestic problems. And so we both have colleagues working on housing supply. I think deal with that. Don’t try to tinker with a symptom downstream from it.

Lincicome: Right. Again, there’s tons of policies that we can implement that would boost manufacturing and the kind of manufacturing we want and that would improve the state of the American workforce. None of them are related to tariffs. And I would add tariffs on manufacturing inputs which is where so much of the Trump administration’s focus is—whether it’s auto parts or steel or copper or aluminum or semiconductors, those are big manufacturing inputs—those are going to harm a lot of manufacturers too.

The reason Ford and GM stock tanked during the whole NAFTA Mexico tariff mess is because those guys need access to the Canadian-Mexican markets for all of this trilateral trade to have competitive supply chains versus like the Asia-Pacific automotive supply chain. When you have blanket tariffs on steel and aluminum imposed, again, the stocks that are getting hit—aerospace got hit. I would much prefer to have a booming aerospace industry and have a slightly smaller steel industry, which by the way is huge and way bigger than our defense department needs in terms of output. I’d much prefer to have the aerospace guys and not the steel guys, and yet we’re obsessed with the steel guys.

Beckworth: In the time we have left, Scott, so there’s a lot we covered here. If you do like free trade, it may seem a bit overwhelming. Although you did give us some optimism early on in this conversation about the arc of history bending back toward more free trade and globalization. But what can someone do? What can free traders do?

How to Support Free Trade

Lincicome: I think the place to start is to acknowledge trade-related disruptions. They are real. There are jobs lost. Always be quick to add that, A, trade is not the primary driver of most of the problems we see in the workforce and the economy. To understand that the biggest thing we can do for people hurt by trade competition is related to adjustment and education. It’s not related to tariffs because tariffs impose massive costs and are incredibly inefficient. I think also to know that and recognize that there are a ton of good free market proposals out there to boost manufacturing and national security and the workforce: tax policy, trade policy, immigration policy, on and on and on, that we should be pursuing if you care about these things instead of these clunky tariffs.

Beckworth: Okay. With that, our time is up. Our guest today has been Scott Lincicome. Scott, thank you so much for joining us.

Lincicome: My pleasure.

Beckworth: Macro Musings is produced by the Mercatus Center at George Mason University. Dive deeper into our research at mercatus.org/monetary policy. You can subscribe to the show on Apple Podcasts, Spotify, or your favorite podcast app. If you like this podcast, please consider giving us a rating and leaving a review. This helps other thoughtful people like you find the show. Find me on Twitter @DavidBeckworth and follow the show @Macro_Musings.