Myth America Part 3: The Balance Of Trade

Toogood Reports ^ | December 18, 2002 | Michael D. Shaw

[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 editor@bestwriters.com .

[Stand Watch Listen]

12/16/02: Lott's Lot
12/02/02: Why Most Teachers Are Leftists
11/25/02: Appreciating The Thanksgiving Holiday
11/18/02: Of Roses And Rossums: Real Crime Out-Performs Fictional Network-TV
11/11/02: Election 2002: Not Exactly A Surprise
11/04/02: Myth America Part 2: Voting
10/28/02: None Dare Call For A Crusade
10/21/02: Sniping In DC — Your Tax Dollars At Work
10/14/02: What's More Important Than The Kids? Just About Anything!
10/07/02: Myth America, Part 1: Diversity
09/30/02: The Catholic Church: There's Bad News And There's Good News
09/23/02: The City Of Angels And Edifice Wrecks
09/16/02: Discredited Historian Doris Kearns Goodwin: Another September 11th Story
09/09/02: September 11, 2001: Until We Cure The Cancer At Home, The War Is Surely Lost
09/03/02: Baseball — The Final Solution
08/26/02: Life Imitates Art: Stephen King Forces Us To Take A Good Look At Ourselves
08/19/02: Patrick Chavis: Celebrating The Wonders Of Affirmative Action
08/12/02: Whatever Happened To The Best And Brightest?
08/05/02: Business As Usual Amidst The Bombs
07/29/02: Signs Of The Times – Or: Don't Get Fooled By The Hype
07/24/02: A Contrarian Looks At The Current Situation
07/15/02: Why Think For Yourself When You Can Take Comfort In The Prison Of Ideology?
07/08/02: Conflicting Role Models: The Master Of Unrepentant Greed And The Martyr To Virtue
07/01/02: Under G-d
06/24/02: Baby Steps On The Road To Hell
06/17/02: Godfather Gotti: A Father's Day Message From The Grave
06/10/02: Surprise! It All Comes Down To Mister Rogers
06/03/02: Cardinal Sins
05/28/02: Justice Delayed In Birmingham
05/20/02: Sniping At Bush From The Left: "By Their Fruits You Will Know Them"
05/13/02: The Church, The World, And Cardinal Law
05/06/02: California Fool's Gold: 460 Years After Juan Rodriguez Cabrillo
04/29/02: Denial, Nihilism, And Functional Atheism: Linchpins Of The Left
04/22/02: Movie Review: "Changing Lanes"
04/15/02: California Child Killer Gets The Death Penalty
04/08/02: It Was The Week After Easter, And All Through The World...
04/01/02: Suicide Bombers Finally Stop Useless Diplomacy In The Middle East
03/25/02: (Not) For Catholics Only: The Current Crisis In The Church
03/18/02: Paying The Price For Diversity
03/11/02: The Screen Actors Guild Saga: How Hollywood Treats Its Own
03/04/02: When Being PC Isn't Enough: The Public Demise Of Doris Kearns Goodwin
02/25/02: Globalization: Real Flesh And Blood Lives Are Being Messed Up
02/18/02: Catholics Betrayed By Their Leadership Too
02/11/02: A Civil Lent, A Christian Lent
02/04/02: The Count Of Monte Cristo

[Fish out of Water]

bump

[ImphClinton]

The consumer is hurt when the dollar goes up and foreign goods thus go up in price. The consumer is also hurt when the dollar goes down and he can't sell his goods overseas for a profit.

Just all in the way you look at it. Overall I agree with the premisis that trade is good though. Surpluses are also not bad as the money is invested in America creating greeat jobs in the process.

[Rodney King]

The consumer is hurt when the dollar goes up and foreign goods thus go up in price. The consumer is also hurt when the dollar goes down and he can't sell his goods overseas for a profit.

It's the opposite.

[MosesKnows]

Thus, the American government, in trying to help

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 somebody’s 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?

[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.

The Road to Productive Wealth

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.

[Jumper]

A much more accurate description of the US Trade Imbalance essentially entails adding our "Services Accounts".

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, don’t 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.

[Physicist]

I once had an argument with a girl from Canada who insisted that trade with the U.S. was bad for Canada. I asked her how. She said in two ways: first, the U.S. comes in and buys up all of Canada's natural resources, outbidding Canadian companies, who can't compete because the U.S. pays more than they're worth. Then, the U.S. uses them to make goods which it dumps back onto the Canadian market. The Canadian companies can't compete because the U.S. charges less than the goods are worth.

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.

[american spirit]

Being in the black may or may not be true however, if we're supposed to be in such good shape why has debt at all levels (fedgov, state, corporate and personal) exploded over the last few years? My belief has always been that easy credit and gov't printing presses running overtime producing fiat currency has only masked the debillitating effects of free trade. In due time when the presses stop and the bills come due we will know sure if this has been the right path. My early vote is a resounding NO!

[El Sordo]

Bump to come back and watch the argument.

[Red Jones]

this article is written by a moron.

People are complaining about trade policies towards china, not japan. Maybe this guy is too stupid to know the difference.

The Chinese currency is set artificially low and fixed to the dollar. It has been that way for more than a decade and it has actually been devalued more than once during that time. In other words, all this idiot moron's analysis is completely meaningless with regard to china.

With a currency set artificially low as it is and not allowed to float, then our manufacturers don't stand a snowball's chance in hell to compete. Boeing, our #1 manufacturer and exporter, is now planning on exporting from Shanghai to the US its' future products. We are witnessing a complete meltdown of american manufacturing. The Chinese still refuse to buy our food. We have 5-1 ratio of chinese imports/american exports with china. It is unprecented in world history. The trade gap alone is 4.5% of our gdp, about 3 times what any other nation has experienced in world history.

[Red Jones]

don't you think that the currencies of our major trading partners should float relative to the US dollar? You're a fool if you don't think so. The Chinese currency is set artifically low and is fixed relative to the dollar. The US government does not pressure china to trade. Republican greenspan just 2 weeks ago testified that we should not worry about the chinese policy of not letting their currency float. Aren't you alarmed at this?

[RLK]

The analysis presented here is simplistic and prematurely terminated so as to avoid examining a wide array of serious realities.

[RLK]

this article is written by a moron. Maybe this guy is too stupid to know the difference.

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

I don't know whether its that or he is intentionall destructive.

[DAnconia55]

Wow. An economics article on FR by someone who gets it....

Marking calendar.

[DAnconia55]

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

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?

:)

[HighRoadToChina]

Ping for later.

[Willie Green]

Ah. You mean like efficient allocation of resources, perhaps?

No. I mean INCREASING the quantity/quality.
Mere reallocation/redistribution doesn't cut the mustard.