Skip to comments.Myth America Part 3: The Balance Of Trade
Posted on 12/18/2002 12:45:15 PM PST by Stand Watch Listen
We have heard, for many years, that the US has an "unfavorable" trade balance with certain countries, including Japan and China, and that this is a very bad thing. This balance refers to the ratio of imports we bring in, to exports we ship out, calculated for a given trading partner.
Consider Japanese cars, and forget for a moment, that some of these are now manufactured in the US. When you purchase a Japanese car, you will pay in dollars, but the manufacturer, say, Toyota, needs to pay its employees in yen. So, these dollars spent in our country, are converted, by a Central Bank, to yen in Japan.
There is a conversion rate for dollars to yen, that changes constantly, and it is based, at least in part, on whether, in the opinion of the Central Bank (and speculators) there are too many dollars relative to yen. If it is judged that there are too many dollars, then the dollar is perceived as "weak" against the yen, and it will take more dollars to exchange the same number of yen. This, of course, is simple supply and demand.
If this trend keeps up, then American cars will seem like more of a bargain, or at any rate, the Toyotas will price themselves out of the market for some American consumers. That will boost the sales of American cars. What a terrible consequence of this unfavorable balance of trade!
Naturally, as the dollar becomes strong against the yen again at some point, the Toyota will become affordable, and the consumer wins again!
Governments, in their infinite wisdom, will sometimes attempt to protect domestic industries by applying quotas and tariffs to certain imported goods. In practice, these measures almost never have the desired effect. A striking example of failure occurs with THE most taxed and restricted import of all--illegal drugs.
During the Reagan administration, import restrictions were placed on certain Japanese cars, ostensibly to protect American manufacturers. Since the tariffs would artificially raise the price and cut the profits on their cars, the Japanese manufacturers reacted by coming out with an entire line of upscale cars, that not only were more expensive to begin with, they would now be competing in a market segment that was less affected by price increases.
Thus, the American government, in trying to help the domestic auto industry, forced them to compete with the Japanese in the luxury as well as the economy market. And, we see that the results of this "unfavorable" balance of trade are lower priced and/or better quality cars. Shameful!
What if, owing to this perennial trade imbalance, Mr. Toyota has billions of dollars in the bank, and the exchange rate for yen is so bad, that he simply hoards them. With fewer dollars in circulation, the rate gets more favorable, and the dollar becomes strong again.
But, what if this doesn't happen fast enough for Mr. Toyota? He has no choice but to spend the dollars in the US, or put them in a US bank. That's a problem? Either domestic sales increase, or a local bank can loan more money to domestic businesses.
If Mr. Toyota doesn't want the dollars to just sit in a bank, he can invest in the US. Heck, he can even build a plant in the US to employ 100% American workers! There doesn't seem to be any consequence of this unfavorable balance that isn't good for America.
At this point, the truly moronic unfavorable balance of trade folks will argue that Mr. Toyota, holding all these dollars, could cause a "run" on our Treasury. How, pray tell? I suppose, way back when, he could have produced his silver certificates and demanded the metal, but in case you haven't noticed, those days are long gone. The US Treasury issues fiat money. There is nothing backing it, other than the stability of the US Government itself.
Finally, there is the matter of domestic industries that might fail under foreign competition. First of all, industries disappear all the time. Nobody uses slide rules or mechanical calculators, buggy whips, or 8-track music cartridges anymore. Should the government have stepped in to save these industries?
Would American consumers be better off buying higher priced goods just to support this or that failing industry? No doubt, there are individual hardships involved, but people get re-trained, and other industries develop. Unless you have a totalitarian dictatorship, you will never be able to force people to buy something they don't want to buy.
So, you tell me what's wrong with an "unfavorable" trade balance. And, while you're at it, tell me what's right about a favorable one. That's what the Japanese have, and their economy is in tough shape at the moment.
The fact is: Notwithstanding legitimate national security issues, trade is good...period.
To comment on this article or express your opinion directly to the author, you are invited to e-mail Michael at firstname.lastname@example.org .
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It's the opposite.
How much longer are we going to kid ourselves? The expression "only trying to help" leads to the next disingenuous expression. The "unintended consequences" as a result of "only trying to help". Ever unintended consequence serves somebodys agenda.
The lesson offered and yet unlearned is that government is more than likely the problem, not the solution. Would it not be a valid observation that often the reason a solution is needed is because the government created the problem?
TRADE DEFICIT: Formally termed a balance of trade deficit, a condition in which a nation's imports are greater than exports. In other words, a country is buying more stuff for foreigners than foreigners are buying from domestic producers. A trade deficit is usually thought to be bad for a country. For this reason, some countries seek to reduce their trade deficit by--
- establishing trade barriers on imports,
- reducing the exchange rate (termed devaluation) such that exports are less expensive and imports more expensive, or
- invading foreign countries with sizable armies.
The only true key to wealth lies in production. While you can increase your own wealth at the expense of others, we all become wealthier when productive resources are increased. Greater wealth for our economy lies in increasing the quantity or quality of productive resources -- labor, capital, and natural resources. This is done by investing in education, capital goods, research and development, and technology.
What works for our economy, can also work for each of us. You can acquire wealth by education, buying productive capital goods, inventing a new product, and assorted other improvements in productive resources.
The US gleans a transaction fee from all type of transactions such as credit card purchases, telephone calls and other "services" passing through Satellites. This is why other governments have spent so much money to own/launch their spacecraft.
When you add other services that produce revenue, dont forget Insurance, Telecommunications, Banking and even stocks . These are areas which do not show up in product trade statistics.
If the world only knew how much the US made by controlling so many aspects of international trade and the avenues of the transactions, they would scream it benefits the US to look like it is hurting in the trade department but when the final tally is taken the US comes out in the Black everytime.
I pointed out that, to hear her tell it, the U.S. turns Canadian raw materials into products for Canadians, paying twice for the privilege...and the Canadians complain about the deal! The girl just gaped like a fish in response.
I don't know whether its that or he is intentionall destructive.
Ah. You mean like efficient allocation of resources, perhaps?
Not making buggy whips when others can make them cheaper, thus freeing up resources for software engineering that were being spent on textiles?
No. I mean INCREASING the quantity/quality.
Mere reallocation/redistribution doesn't cut the mustard.