In Defense of "Trade Deficits"

Washington Times via Capitalism Magazine ^ | March 22, 2003 | Daniel J. Mitchell

[1rudeboy]

Summary: A nation isn't harmed when it imports more than it exports, which is why the trade deficit is the most dangerous statistic collected by government.

New Commerce Department data show that the United States set a record in 2002, importing $435 billion more than we exported. This trade "deficit" immediately generated howls of anguish. "A real downer," said the president of the National Association of Manufacturers. The head of the AFL-CIO claims it's "a catastrophe for working Americans who are losing their jobs, health care and stable communities due to our nation's failed economic policies."

This end-of-the-world rhetoric is completely misguided. A nation isn't harmed when it imports more than it exports, which is why the trade deficit is the most dangerous statistic collected by government. It leads some people to support protectionist policies because they're convinced America is losing a critical international battle.

But America isn't in a battle. It is people who trade, not countries, and people trade because it makes them better off. This is true if someone in Virginia trades with someone in Maryland, and it is also true if someone in Kansas trades with someone in Singapore.

Protectionists usually will admit that free trade is a good idea, at least in theory, but then argue that the "trade deficit" shows there's an imbalance that must be corrected. Yet, they offer no evidence for this hypothesis. I have trade deficits with my local supermarket, movie theater and gas station: I buy lots of things from them and they never buy anything from me. Why is that bad? Should politicians and bureaucrats be allowed to limit my freedom to make these purchases in order to "protect" me from a trade deficit?

The same analysis applies to the overall economy. At any given point in time, Virginia may have a trade deficit with Maryland and the United States may have a trade deficit with Germany. But these deficits are merely the result of millions of voluntary transactions between producers and consumers. And unless we're willing to assume that people are idiots, those transactions benefited both buyers and sellers. Would these people be better off if politicians and bureaucrats used quotas and trade taxes to hinder trade?

The evidence clearly says no. The 1930 Smoot-Hawley legislation was supposed to protect American jobs, but instead it helped cause record unemployment and the Great Depression. Countries today with high trade barriers - like Japan - suffer from anemic growth, while free-trade jurisdictions prosper. Unfortunately, protectionists won't heed economic arguments. They seem convinced that a trade deficit is like cancer, something that's always bad news. In reality:

• A trade deficit usually is a sign of economic vitality. America's economy may not be booming, but we're doing much better than most other countries. And because we're growing faster and earning more, we can buy lots of goods and services, regardless of where they are produced. Japan has a trade surplus, but it also is mired in a 10-year economic slump. Would anybody be crazy enough to want to trade places? How about Europe? It has a trade surplus with America, but would anyone seriously suggest that we mimic the high-tax, high-unemployment economies of France and Germany?

• A trade deficit means America is enjoying an investment surplus. Foreigners earn lots of money by selling goods and services to Americans. Protectionists seem to think that foreigners should use that money only to buy an equivalent amount of goods and services from Americans, but many foreigners consider the United States is a good place to invest. As a result, a substantial share of the money we send overseas to purchase TV sets, cars, oil and bananas winds up getting invested in our economy. Foreigners think our economic future is bright, and they're helping to create jobs and prosperity in America by putting money in U.S. banks and buying stock in U.S. companies. This is a vote of confidence, a sign of America's strength.

Because protectionist sentiment often is an emotional reaction to the trade deficit, perhaps using a new term can mute this self-destructive impulse. Instead of publishing "trade deficit" statistics, the Commerce Department could publish "investment surplus" statistics. Journalists then could discuss a real story - how capital is fleeing uncompetitive slow-growth economies and coming to America.

Of course, our exports can be hampered by protectionist policies in other nations. (Japan, for instance, imposes a tax of nearly 500 percent on imported rice.) American policy-makers should work to diminish those barriers.

We also should make sure we aren't hurting ourselves. America has one of the highest corporate tax rates in the developed world. This is hurting U.S. competitiveness, especially since we then tax that income a second time at the individual level.

There are many things lawmakers can do to make America more competitive, but protectionism isn't the answer. Trade barriers are the siren song of special interests and the refuge of those who doubt America.

Originally published in The Washington Times

About the Author: Daniel J. Mitchell, Ph.D. is McKenna Senior Fellow in Political Economy in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

[1rudeboy]

I remain Willie Green's evil twin brother.

[lelio]

But America isn't in a battle.

America isn't, but China sure is. In the PLA's own words:

In the seminal Chinese treatise on modern strategy "Unrestricted War" by People's Liberation Army Cols. Qiao Liang and Wang Xiangsui published in 1999, the unfolding financial crisis is compared to military conflict: "Economic prosperity that once excited the constant admiration of the Western world changed to a depression, like the leaves of a tree that are blown away in a single night by the autumn wind. After just one round of fighting, the economies of a number of countries had fallen back 10 years. What is more, such a defeat on the economic front precipitates a near collapse of the social and political order. The casualties resulting from the constant chaos are no less than those resulting from a regional war."

[1rudeboy]

Gosh, I wonder if they had the ping-pong ball industry in mind when they wrote their treatise.

[RLK]

What I am coming inexorably to conclude is that everyone involved in the so-called radical capitalism and allied movements is just plain nuts.

[lelio]

The 1930 Smoot-Hawley legislation was supposed to protect American jobs, but instead it helped cause record unemployment and the Great Depression.

I wish Capitalism Magazine wouldn't keep on digging up this old canard. Smoot-Hawley is now causing the Depression? Give me a break.

I have trade deficits with my local supermarket, movie theater and gas station: I buy lots of things from them and they never buy anything from me.

That's straight out of RLK's paper Econ 543:

The point is, my immediate so-called trade deficit with the supermarket is an economic transaction that reaches far beyond the artificial rhetorical confines of that statement. It is an initial step that enters the money I spend into supporting a larger swirling monetary economic pool where the money is combined and mixed with further series of complex economic interactions which result in a return of money into my business through an indirect course. It can be called indirect reciprocation. The buying of goods from foreign nations and the permanent transfer of funds of payment to those nations under continuing deficit conditions does not result in the transferred funds returning to me through my business. This is where a serious and competent analysis should lead.

[1rudeboy]

I don't buy it [pun intended]. This article mentions that a good number of our dollars sent "overseas" are re-invested here. Furthermore, foreign companies that set-up shop here tend to re-invest their profits here in order to avoid taxes in their home countries and to minimize exchange-rate risk.

[Jorge]

Cato Institute has some interesting infomation about trade deficits;

"Economic theory and experience demonstrate that trade deficits are driven primarily by macroeconomic factors, in particular investment flows, and not by allegedly unfair trade barriers or declining industrial competitiveness.

Because of the link between trade deficits and rising investment, larger trade deficits are typically accompanied by improving economic conditions. A survey of the U.S. economy since 1973 confirms that, by almost any measure-economic growth, employment, industrial production, poverty reduction-the economy has per-formed better in years in which the trade deficit rose than in years in which it shrank."

[genghis]

as the great ucla economist Armen Alcian once said
"the trade deficit has as much to do with economic health as my golf score."

[1rudeboy]

I think you're on the wrong thread. This thread is about Americans spending money on imported goods.

[liberallarry]

I buy lots of things from them and they never buy anything from me

They buy money from this moron. Which is why his argument is so stupid.

[1rudeboy]

They buy paper. Which needs to be re-invested in plant and equipment, invested elsewhere, or distributed to shareholders. Where do you think it goes?

[underbyte]

"buy lots of things from them and they never buy anything from me
They buy money from this moron. Which is why his argument is so stupid. ""

You beat me to it, I was going to say idiot

[1rudeboy]

You might want to reconsider your credit-card analogy. If I buy a foreign-made juice-squeezer, I'm not paying interest.

[RLK]

Once again, typically useless corporate execs make out on increased stock valuation (which just got an additional boost thanks to his decision to offshore half his workforce) while Joe American doesn't see a dime.

--------------

I'm glad you noticed.

[Jorge]

"A survey of the U.S. economy since 1973 confirms that, by almost any measure-economic growth, employment, industrial production, poverty reduction-the economy has per-formed better in years in which the trade deficit rose than in years in which it shrank."

Yeah, and my standard of living is a lot higher in the years in which I am charging up my credit card, than the years in which I am paying it off.

Poor comparison.

Read the above statement again.
The trade deficit is the result of prosperous times...and people having the extra cash on hand to buy more.

It is NOT the result of living high by going into debt.

You've got it backwards.

[Willie Green]

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--

1. establishing trade barriers on imports,
   
2. reducing the exchange rate (termed devaluation) such that exports are less expensive and imports more expensive, or
   
3. invading foreign countries with sizable armies.

Here are the facts:

Gross Domestic Product (GDP), the measure of the USA's output of goods and services, is calculated by the Commerce Department's Bureau of Economic Analysis using the following items:

• Personal consumption expenditures: Personal consumption expenditures are far and away the largest and tends to be the most stable of the four expenditures, averaging about 65-70% of gross domestic product.
• Gross private domestic investment: Expenditures on capital goods to be used for productive activities in the domestic economy that are undertaken by the business sector during a given time period. Gross private domestic investment tends to be the least stable of the four expenditures, averaging between 12-18% of gross domestic product.
• NET EXPORTS OF GOODS AND SERVICES Net exports of goods and services is the smallest of the four expenditures, averaging around 2% of gross domestic product. Unlike the other expenditures, net exports of goods and services can be either positive or negative. They are positive when exports are greater than imports (Trade Surplus) and negative when exports are less than imports (Trade Deficit). In recent years, net exports of goods and services have been negative.
• Government consumption expenditures and gross investment measures government purchases undertaken by the government sector. Government consumption expenditures and gross investment averages between 15-20% of gross domestic product. This percentage tends to be ebb and flow a little with the political winds.

The BEA News Release for FIRST QUARTER 2003 provides us with the following current data for these items. (Seasonally adjusted at annual rates)

Gross domestic product (GDP)............................. $10,697.7 billion
Personal consumption expenditures.......................... 7,502.8 (70.13% of GDP)
Gross private domestic investment.......................... 1,626.9 (15.21% of GDP)
Net exports of goods and services........................... -485.7 (-4.54% of GDP)
Government consumption expenditures and gross investment... 2,053.6 (19.20% of GDP)

The current BALANCE OF TRADE is in deficit, which is considered unfavorable.
That is why it is SUBTRACTED from those items that comprise GDP.

And at historic highs, it diminishes our domestic economy by about 4½% - more than twice the normal variation. This is NOT insignificant.

[Willie Green]

I wish Capitalism Magazine wouldn't keep on digging up this old canard. Smoot-Hawley is now causing the Depression?

It's amazing that these idiots keep repeating this tripe. The stock market crashed in October, 1929, but Hoover did not sign the tariff into law until June 17, 1930. There's no way that Smoot-Hawley could have caused the Great Depression.