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balance of trade problem solved

The Balance of Trade Deficit Requires Government Action
#23 in a series from FEE.ORG

(Editor’s Note: An earlier version of this essay was published in The Freeman in December 1998.)

I have a dirty little secret. It’s about a nagging problem I have had for a long time. It just never seems to go away. Heretofore, I have not wanted to admit to this problem in public because the newspaper headlines remind me monthly that this sort of thing is bad and embarrassing.  But I’m going to come clean, hoping that maybe someone out there can help me.

My problem is this: I have a trade deficit with J.C. Penney. That’s right. Year after year, I buy more from J.C. Penney than J.C. Penney buys from me.

In fact, J.C. Penney has never yet bought anything at all from me. It’s been a one-way street right from the day I got my credit card in the mail. And I don’t expect that this is going to change any time soon because the retail chain shows no interest in buying my chief export, which is columns like this one. It just doesn’t seem fair.

I’ve actually considered several options. Each one would probably reduce or eliminate my trade deficit with J.C. Penney, but some wise guy always points out new problems that each of these scenarios might create:

1. I could get Congress to force the company to buy enough of my articles to offset what I spend in its stores. But the more J.C. Penney buys from me, the less it will be able to buy from others, which will only increase their trade deficits.

2. I could get Congress to force J.C. Penney to cut its prices so that I won’t have to spend as much to get what I want. I thought that might at least reduce my deficit, but at lower prices I might actually be tempted to buy more. Or J.C. Penney might come under fire from the antitrust people for dumping its goods below cost.

3. I could simply quit buying from J.C. Penney. That would really teach them a lesson. But then, doggone it, I like what I’ve been buying from them. If I boycott them, wouldn’t that be like cutting off my nose to spite my face?

Of course, I don’t really mean any of this. As an economist, I know that there’s a fourth option here and it’s the only one that makes any sense: I should ignore this “problem” and never pay any attention again to whatever the trade situation is between J.C. Penney and me, except to pay my bills on time. America as a whole should do essentially the same thing. If we fired the people in Washington, D.C., who compile the balance of trade numbers, the so-called problem will go away.

Every month, the U.S. Commerce Department releases the official “balance of trade” figures showing the difference between the value of merchandise that enters the country and the value of merchandise that leaves the country. If imports exceed exports, America has a trade deficit, which sets off alarm bells in Washington. If exports are greater than imports, we’re all supposed to celebrate because that’s a trade surplus.

By this logic, draining the country of all goods and accepting none from abroad would be the best possible trade news. We wouldn’t be able to celebrate, however, because we’d all starve. But at least the government’s books would register one heck of a trade surplus.

The balance of trade numbers, by the way, represent a very incomplete picture of trade. They attempt to measure merchandise only, but traders exchange many other things, too. If a Canadian businessman sells Americans lumber, he earns dollars but he doesn’t have to buy merchandise with them. He might instead invest in real estate, purchase securities (government or private), or contract for certain services. Those things don’t get counted in the “balance of trade.”

Progressives aren’t the only ones who get hung up on this trade-deficit thing and then favor pseudo-solutions to a non-problem. It’s a throwback to the less enlightened times of sixteenth-century mercantilists. They argued that a nation must never buy more from foreigners than it sells to them because that would produce an “unfavorable balance of trade” that would have to be settled by an outflow of gold or silver. The mercantilists wrongly assumed that gold and silver were the real wealth of a nation, not goods and services. They were also wrong to render value judgments about other people’s trading activities. The fact is that there can be nothing “unfavorable” about voluntary trade from the point of view of the individuals actually doing the trading, otherwise they would not have engaged in it in the first place.

The principle that both sides benefit from trade is readily visible when it involves two parties within a country; it somehow becomes confused when an invisible political barrier separates the parties. Neither the mercantilists of yesteryear nor those who fuss about the trade deficit today have ever satisfactorily answered this fundamental question: Since each and every trade is “favorable” to the individual traders, how is it possible that these transactions can be totaled up to produce something “unfavorable”?

Scottish economist Adam Smith was among the first to at­tack the notion that exports are good and imports are bad. He pos­tulated a “harmony of interests” in trade, by which both parties to an exchange benefit. With the excep­tion of obvious fraudulent prac­tices, which are minimal in number and a responsibility of the courts, there can be nothing “unfavorable” about voluntary trade from the point of view of the individuals do­ing the trading, otherwise those in­dividuals would not have engaged in it.

To return to my initial example, I benefit when I buy from J.C. Penney or I wouldn’t keep doing it. The folks at J.C. Penney benefit as well because they would rather have my money than the stuff they sell me. We’re both better off because we have a trade relationship, which is why neither party ever complains about it. This would be no less true if J.C. Penney happened to be a company from Japan or Uganda.

Ultimately, the dollars that go abroad to pay for imports will come back to buy American exports. But even if they didn’t—in other words, even if goods come here and dollars go there to simply stuff foreign mattresses—Americans with their supposedly harmful trade deficit would have the better end of the deal. We would get goods like electronics and automobiles, and foreigners would be stuck with slips of paper decorated by pictures of dead American politicians.

Forget the trade deficit. We should occupy ourselves with more important things, like the next sale at J.C. Penney.

Lawrence W. Reed
President
Foundation for Economic Education

Summary

 

  • Each of us as individuals has a “balance of trade” with other individuals, but none of us cares about the numbers; we care about the goods and services we’re trading for.
  • Balance of trade figures count only merchandise. They leave out a huge chunk of world trade involving other things, from real estate to securities to services.
  • No trades are deemed as anything but “favorable” by those engaged in the trading, so how can anyone add all those trades up and arrive at something “unfavorable”?
  • For further information, see:

“The Balance-of-Payments Deficit: Not to Worry” by David R. Henderson: http://tinyurl.com/k998d3s

“The Trade Deficit Is Debt? It Just Ain’t So!” by Donald J. Boudreaux: http://tinyurl.com/qg2hp4w

“A Deficit of Understanding” by Donald J. Boudreaux: http://tinyurl.com/mb8lnlg

“Tax Cuts Cause Trade Deficits and Currency Depreciation?” by Joseph Salerno: http://tinyurl.com/owq9qlg

 

 

The Foundation for Economic Education (FEE) is proud to partner with Young America’s Foundation (YAF) to produce “Clichés of Progressivism,” a series of insightful commentaries covering topics of free enterprise, income inequality, and limited government.

Our society is inundated with half-truths and misconceptions about the economy in general and free enterprise in particular. The “Clichés of Progressivism” series is meant to equip students with the arguments necessary to inform debate and correct the record where bias and errors abound.

The antecedents to this collection are two classic FEE publications that YAF helped distribute in the past: Clichés of Politics, published in 1994, and the more influential Clichés of Socialism, which made its first appearance in 1962. Indeed, this new collection will contain a number of essays from those two earlier works, updated for the present day where necessary. Other entries first appeared in some version in FEE’s journal, The Freeman. Still others are brand new, never having appeared in print anywhere. They will be published weekly on the websites of both YAF and FEE: www.yaf.org and www.FEE.org until the series runs its course. A book will then be released in 2015 featuring the best of the essays, and will be widely distributed in schools and on college campuses.

See the index of the published chapters here.