Tricky stuff, trade, especially when it comes to the data. According to recent analysis by the Office for National Statistics, when you add up the world's trade statistics, planet earth is found to have a trade surplus with itself of around £350 billion ($665b).

You might even fancy that Elon Musk has secretly already found a way of exporting to Mars, such is the otherwise logical impossibility of the finding. The real life explanation is altogether more prosaic.

Virtually all countries routinely underestimate their imports, if only because they are so much harder to measure than exports. One country's trade statistics therefore scarcely ever agree exactly with another's. A cynic might say the bias is deliberate, given the supposed economic virtue of a healthy trade surplus.

The complexities of the modern supply and value-added chain create further distortions. For instance, the iPhone counts as an import from China, where it is manufactured, even though the vast majority of the value added is intellectual property and resides with Apple in the US. China's apparent trade surplus with the US, and indeed elsewhere too, is therefore not all that it seems. What's more, the global nature of the capital markets makes it especially difficult to measure trade in financial services.


Nowhere is the asymmetry in the reported numbers more apparent than with Britain and the US.

Britain imagines itself to have a very substantial trade surplus with the US, particularly in services, while the US is equally boastful of a sizeable surplus with us.

Try as the ONS and its American counterpart, the Bureau of Economic Analysis, have to reconcile the difference - an astonishing £33b annually in goods and services at the last count - so far they have failed. Identified variations in accounting explain only £4b of the gap.

These measurement issues matter because whether or not a country has a trade surplus with another tends crucially to inform trade relations between the two, and politically acts as an important backdrop to any free trade negotiations.

International trade is the sustenance that keeps countries peaceful. Disrupt it at your peril.


As a basic economic principle, it is important to recognise that all trade is good, even when it results in a deficit. One way or another, the books will always balance, whether it be through currency adjustment or cross-border flows of capital. In macro-economic terms, the gap isn't of itself hugely significant.

China has expanded its holding of US Treasuries to US$1.18 trillion and when push comes to shove, these dollar assets will be weaponised. Picture / Getty Images
China has expanded its holding of US Treasuries to US$1.18 trillion and when push comes to shove, these dollar assets will be weaponised. Picture / Getty Images

But politically, it matters a lot. US President Donald Trump, and his commerce secretary, Wilbur Ross, have turned the issue into a political creed; trade surplus good, trade deficit bad, the latter signalling unfair trade practice which costs American jobs.

True to his word, Trump has already imposed new tariffs on imported washing machines and solar panels. Soon, using the pretext of national security, he'll be choosing between options for limiting imported steel and aluminium. The protectionist agenda has arrived, albeit in so far relatively limited form.

This is not yet a repeat of Smoot-Hawley, the US tariff act strongly associated with the Great Depression and the breakdown in international relations that led up to the Second World War.

Trump's actions are for the moment mere warning shots across the bows. He denies protectionist intent and insists it's only about securing supposedly fairer trade terms.

But it may not remain so; in recent months, Trump has turned his attention from China to Europe, and particularly Germany, which he labels a "currency exploiter". The EU's trade surplus with the US grew a further 6.7 per cent last year to US$150.9b ($206.2b). In the President's eyes, Europe, not China, is now public enemy number one.

In view of upcoming, post-Brexit trade talks with the US, it might therefore be wise to keep as quiet about the statistical differences between the US and Britain as possible.

If America thinks it has a whacking great trade surplus with Britain, let them carry on believing it. The UK is more likely to get a decent deal if the US is convinced that it starts with the advantage.

But there is a much wider problem for the Trump Administration here than mere statistical anomaly; when it comes to trade, his economic policies are a contradiction in terms.

Planet earth has a trade surplus with itself of about $665 billion. Picture / AP
Planet earth has a trade surplus with itself of about $665 billion. Picture / AP

On the one hand the President aims to eradicate the deficit; his attempts to renegotiate the North American Free Trade Agreement, and to force greater access to Chinese and European markets, are specifically designed to narrow the deficit.

But on the other, he's pumping up the economy with unfunded tax cuts. He's also irresponsibly promised all manner of pork barrel spending to buy off Republican opposition. The consequent fiscal stimulus will have the opposite effect to the one desired.

The extra spending will suck in imports, interest rates will rise to counter inflationary pressures, the US dollar - mysteriously weak for the moment - will rise precipitously, making imports cheaper still and causing the current account deficit to widen further.

With the return of the famous "twin deficits" - a ballooning budget deficit alongside a deepening current account deficit - it will be like Ronald Reagan in redux.

The difference is that Reagan was not a protectionist. His tax cutting stimulus also came while the economy was still weak, whereas Trump's is at the end of an already very long in the tooth business expansion.

Some aspects of the Trump tax reforms are overdue, but the unfunded, top of the cycle nature of the giveaway creates real economic dangers.

How badly all this ends depends crucially on how Trump reacts to a current account which is failing to behave as he would have wished, but is instead obeying basic laws of economics. If he lashes out with a fully fledged Smoot-Hawley type protectionist agenda, then everyone is in real trouble.

All that asymmetry in the trade statistics will cease to have any relevance at all. Much more seismic forces will come into play, including retaliatory action by China, which has recently expanded its holding of US Treasuries to US$1.18 trillion.

When push comes to shove, these dollar assets will be weaponised, never mind the potential portfolio loss, ramping up the cost of US debt at a time when the federal government is hugely increasing its borrowing needs.

International trade is the sustenance that keeps countries peaceful. Disrupt it at your peril.