Another reason Mr. Trump (as well as Mrs. Clinton) is wrong about trade.

Economists have almost universally condemned Donald Trump’s proposals on international trade citing the benefits of Ricardian competitive advantage as well as the benefits to consumers of lower prices. They are, of course, correct. And trying to reshore manufacturing plants back to the US through threats and tariffs will not result in widespread blue-collar employment as Mr. Trump predicts. Those jobs will go to robots as is already happening – only faster. (Mrs. Clinton's position on trade is more nuanced than Mr. Trump's, supporting the Trans-Pacific Partnership as Secretary of State while opposing it as a presidential candidate.)

I am not publishing this essay to echo those economists. No, I am here to talk about the benefits of the US trade deficit. From an accounting point of view, international trade is a zero sum game. Because all the accounts must balance the global net is zero. If someone has a surplus, someone else, by definition, must have a deficit. Mr. Trump sees a deficit as losing and he hates to lose. But the United States can run a permanent trade deficit and it will not hurt us. In fact, it is a great benefit for us and for the rest of the world as well.

Few international companies want their customer’s local currency. The US dollar is the world’s primary reserve currency, so most of these companies want to receive US dollars or some other reserve currency. Even the old Soviet Union wanted US dollars for its exported goods. But it didn’t want its dollars in a US bank in the United States. So the Soviet Union convinced banks in the countries they traded with to hold the dollars for them. The banks, being banks, had to figure out what to do with those dollars so they decided to lend them out to customers around the world that needed dollars for their transactions. This was the creation of the Eurodollar market that has flourished ever since.

Prior to the Eurodollar market, French banks could basically only offer French franc loans or local currency loans from whatever local currency deposits they might have (this was before the Euro). That was fine for some purposes but many customers wanted to do transactions with countries other than France and this required a reserve currency such as the dollar. If the US had balanced trade or worse a surplus there would be very few dollars available to the French bank to lend out. They would have to go a US bank (or their branch in New York) to borrow the money so they could relend. Borrowing the dollars would have taken too big a bite of profit margins (and using a US branch to only get deposits to send back to headquarters was a poor way to take advantage of a foothold in America).

So we buy stuff overseas and give them US currency that they keep offshore. When other countries run a persistent deficit, their trading partners sell the local currency they receive to convert the money back into their own currency (or they convert it into a reserve currency such as the dollar). These persistent sales of currency drive down its exchange rate making imports more expensive and exports more competitive (which should eventually cause exports and imports to rebalance). But the US currency stays strong despite persistent deficits because people don’t sell their dollar holdings. No other country has this ability. People don’t trust the renminbi. They shouldn’t trust the Euro. Yen is too small a market and the pound way too small.

It is true that persistent US trade deficits have cost us some GDP, but we have also gained because we have saved enormous amounts of money because we can buy foreign goods cheaply. Keep in mind that even though our deficit has grown, we now export over three and one-half times as much as we did the year before NAFTA was signed (and manufactured goods are up 3.3 times).

More than that, we have created a US-centric international market that, supported by numerous US sponsored institutions such as the World Bank and the IMF to administer this market, has greatly benefitted the entire world lifting billions out of poverty and promoting good governance across the globe. It is this global system that has made America the world’s financial superpower.

Does this mean that our international trading alliances are perfect? No! Many countries do not follow the terms of our trade agreements with them. They cheat on standards, they raise non-tariff barriers and they steal our intellectual property. The theft of intellectual property is especially egregious to the US because intellectual property is an important and growing part of our economy. We don’t need to renegotiate our current trade agreements. We need better enforcement of the ones that we currently have.

Since the end of World War II western nations led by the United States have set up a global economic and administrative system that, although not perfect, has worked pretty well. Global trade has blossomed and billions of people have benefitted from this system. But the fragility of this system has been highlighted by new and growing challenges while American leadership has faltered in recent years. Mr. Trump’s proposals would not only damage the American economy they could fatally harm the global economic system that has greatly benefitted the American people.