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We should be having a real discussion on what to do about those who have lost out from globalization and its companion, technology.

No one likes the word deficit. In government finance it means you spend more than what you raise in revenue. And in trade it means you import more than you export. U.S. President Donald Trump has repeatedly pointed to widening trade deficits with countries such as China and Mexico as proof positive that his predecessors have made bad trade deals.

But it is misleading to think of trade deficits in that way. At the very least, the reality is far more nuanced.

First, imports have a beneficial impact. More countries selling to the U.S., or Canada, means more affordable goods for consumers, which has helped boost what’s called the “C” variable — consumer spending. In the U.S., in fact, if we remove food and energy from the equation, prices of goods have fallen every year since the implementation of NAFTA. And while many businesses and high-skilled workers benefit heavily from trade, most lower-income workers also benefit since they, in disproportionate numbers, buy the cheaper imports that have flooded advanced-world markets.

So raising trade barriers in the U.S. is going to lead to higher prices for consumers, creating some blowback, even if some manufacturing jobs do end up coming back to America. Trump’s new Commerce Secretary, Wilbur Ross, is making more positive sounds about lowering trade barriers abroad. The administration should think along those lines first, if the focus remains on U.S. trade deficits.

However, any relevant trade debate is less likely to be constructive if the Trump administration crafts its actions around the notion that trade deficits are inherently bad.

After all, imports are often used as cost-effective inputs for the production of export goods. Thus what is important to GDP is not how much we export relative to our imports, but the extent to which imports contribute to our domestic production and welfare in general. And better yet, the real gain from trade is that it enhances our ability to specialize, leading to gains in productivity — without imports, there would be fewer well-paying export jobs. One reason why Canada’s trade balance swung into trade deficit in the aftermath of the Great Recession is that our economy was actually doing better than that of other nations.

Of course, more open trade, in general, has not benefited everyone and this is where the real debate should focus.

If you are lower-skilled and worked for years in certain manufacturing jobs, globalization — symbolized in the U.S. by a flood of imports from China or Mexico — has likely had a negative impact on your relative income level and living standard. China’s ascension to the WTO, in particular, and the subsequent required reduction in trade barriers with that country, flooded advanced economies, including the U.S., with cheap imports. Overall, those imports did lead to job losses in some U.S. manufacturing sectors, most notably in parts of the country that voted for Trump. It is not surprising that affected individuals latched on to Trump’s anti-trade sentiments.

We should be having a real discussion on what to do about those who have lost out from globalization and its companion, technology. Retraining can only do so much in an era of fast-paced changes. What is required is a rethink of lifetime training and social safety nets — and sharper thinking about the tradeoffs between efficiency and equity. But this will all be more difficult if we start thinking of trade as something that needs to be brought in balance, at the cost of reduced overall trade flows.

Jeremy Kronick is a Senior Policy Analyst at the C.D. Howe Institute.

Published in the Financial Post

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