Freeman

ARTICLE

The Trade Deficit: Much Ado About Nothing

Trade Deficits Are Not Harmful

DECEMBER 01, 1998 by LAWRENCE W. REED

I have a dirty little secret that I want to share with readers of The Freeman. 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 it’s 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. Month after month, 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 each of these scenarios might create:

  • I could get Congress to force the company to buy enough of my columns 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.
  • 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.
  • 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 a free-market 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. We should fire the people in Washington, D.C., who compile the numbers, and the 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.

This trade-deficit silliness is 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”?

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.

America’s trade deficit with the rest of the world made headlines regularly in 1998 because it broke at least one quarterly record. The Asian depression was one reason. Plagued by weak economies, Asians purchased fewer American goods. The fall in the value of many Asian currencies made goods from places like Japan and Indonesia cheaper here, where a relatively strong economy had already boosted American demand for foreign goods. No one who actually engaged in the transactions that produced the trade flows between the United States and Asian countries did so because they wanted to hurt themselves, yet the trade deficit alarmists say that those traders somehow hurt this country.

Ultimately, the dollars that went 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 VCRs 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’s.

ASSOCIATED ISSUE

December 1998

ABOUT

LAWRENCE W. REED

Lawrence W. (“Larry”) Reed became president of FEE in 2008 after serving as chairman of its board of trustees in the 1990s and both writing and speaking for FEE since the late 1970s. Prior to becoming FEE’s president, he served for 20 years as president of the Mackinac Center for Public Policy in Midland, Michigan. He also taught economics full-time from 1977 to 1984 at Northwood University in Michigan and chaired its department of economics from 1982 to 1984.

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