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Thursday, March 8, 2018

The U.S. Has a YUGE Merchandise Surplus with China (and That’s Okay)

Sure, it causes some reconfiguring of the American economy, but that has made us incredibly wealthy.

I have a huge trade imbalance with Wal-Mart.


I spend hundreds of dollars on groceries and other items every month, but never—not once—has Wal-Mart ever bought something from me. Maybe I should stop shopping at Wal-Mart as a way of sticking it to them.

Or not.

My trade imbalance with Wal-Mart makes me better off.

I actually benefit a great deal from my trade imbalance with Wal-Mart. Generally speaking, my groceries are cheaper than at other stores I could shop at, and the wide selection of home, auto, electronic, and other valuables makes getting what I need easy, even when the contents of my list are diverse.

My trade imbalance with Wal-Mart makes me better off, not in spite of the fact that they take my money, but because they take my money. I can’t eat dollar bills, after all, nor can I use them to keep me warm or maintain my car. Hoarding money (by, say, stuffing it under my mattress) does me no good. But the goods I can get by giving it to Wal-Mart can feed me, keep me warm, and ensure that my car runs as it should.

You might think it’s silly to think of my economic relationship with Wal-Mart as a trade imbalance, and you’d be right. Assuming you’re among the one-in-three Americans that remains skeptical of international trade, you’d probably even agree that it would be bizarre to think of trade between states—Idaho and California, for example—in terms of deficits and surpluses. (Which saves us from having to calculate the ratio of potatoes to computer chips, am I right?). But here’s an interesting principle hidden in our examples: borders are economically irrelevant to trade. Put differently, the same rules of economics apply equally to trade across international borders as to trade between individuals and across state borders.

Trade Goes Full-Circle

Let’s go back to my trade imbalance with Wal-Mart: when I buy from Wal-Mart, I’m not losing by giving up my dollars in exchange for goods. If anything, I’m winning. After all, in a normal trade situation, each side has to feel as though they’re walking away better than when they started, or the trade won’t take place at all.

The same is true in international trade. As economist Mark J. Perry points out, it’s individuals and firms that engage in trade, not countries (in the abstract). Furthermore, Perry argues, in exchanging goods with foreign producers (China, for example), it is just as reasonable to think of Americans as having a “merchandise surplus” exactly equal to the number of dollars spent on Chinese goods, and of Chinese consumers as having a “merchandise deficit” equal to the (comparatively smaller) number of dollars spent on American goods. And why shouldn’t we think in those terms? After all, the poor in every country (including China and the United States) are able to buy, on average, 60 percent more merchandise because of international trade than they would otherwise be able to without it.After all, the poor in every country are able to buy 60 percent more merchandise because of international trade.

But what of the dollars that have now gone to China? I hinted at this in the previous paragraph: they come back to the United States in the form of foreign direct investment (FDI for short) by Chinese firms and the purchase of American goods by Chinese consumers. America may have a trade deficit (in terms of dollars leaving the country), but it also has a surplus in investment and lending. This is great news for Americans: the US International Trade Administration estimates that FDI from American trading partners supports about 12 million jobs in the United States.

You may no doubt object at this last figure. After all, you might argue, trade deals have resulted in the loss of American jobs. And that’s actually true. Between 2000 and 2010, for instance, NAFTA (the North American Free Trade Agreement) resulted in the loss of 728,000 manufacturing jobs, thereby displacing American factory workers. This was no doubt an extremely stressful reality for those workers, but there are some things to keep in mind about this number:

  • because of trade with Mexico, factory wages in American jobs created by NAFTA are 15-20 percent higher than the wages in those quarter-million lost jobs
  • manufacturing output in the United States has increased 40 percent since the US entered NAFTA
  • during the period of 2000 to 2010, 5.6 million manufacturing jobs were lost in total, only 13 percent of which (those 730,000 jobs I mentioned before) were due to international trade—fully 85 percent of those 5.6 million jobs were destroyed because of gains in productivity from technology
  • the resulting fall in consumer prices, rise in productivity, and increased range of goods available amount to a net gain of $450,000 to the American economy per job lost—that’s $327.6 billion, which sure isn’t chump change
  • and, lest we think of those jobs destroyed by NAFTA as a static loss to American workers, the United States economy creates and destroys somewhere in the neighborhood of 7 million jobs every quarter, or ten times the number of jobs destroyed by NAFTA over the course of a decade.

“Objection!” you might respond. “Trade with our enemies represents a national security threat.”

Well… no. Taking steel production as an example, 70 percent of the steel used in American manufacturing is American-made, and the vast majority used in national defense manufacturing is American steel. Besides, the four countries from which the United States imports steel the most are our allies. But even if this weren’t the case, economic interdependence between countries tends to act as a conflict deterrent—if your political enemies have huge investments in your economy, and vice versa, why would you bomb each other?

“Ah,” you say, “but international trade and globalization have led greedy American companies to send American jobs overseas in search of cheap labor.”

The reality is that 90 percent or more of jobs outsourced are meant to service foreign markets. International trade, after all, is the best means of opening up wider markets for American goods. In fact, the evidence shows that a 10 percent increase in American business investment in other countries is associated with a 2.2 percent increase in investment by American firms in the United States, and for every 10 percent rise in pay for foreign employees of American companies, American employees at home enjoy a 4.0 percent pay-raise. And this isn’t just true for Americans. Increasing the volume of trade leads to higher wages in general.

Freer Trade Equals Fast Economic Growth

“What about making sure American companies are competitive in a global market?” you ask.

In our age of global markets, supply chains are widely distributed across nations. In fact, 43 percent of imports are production goods—goods that American firms use in the process of making consumer goods—and the costs of tariffs on imports are shared almost equally between the foreign producer and the domestic consumer, so tariffs aren’t just “taxes on other countries.” The real-world outcome of tariffs is to increase prices and decrease demand, making consumers poorer—not awesome.

Historically, the nations that have been most competitive in trade have been those nations with the most liberal trade policies.

And historically, the nations that have been most competitive in trade have been those nations with the most liberal trade policies. In developing nations with freer trade, economic growth averaged 4.49 percent per year from 1970 to 1989, while developing nations with higher tariffs and more restrictive trade only grew 0.69 percent annually during that period. Among developed nations like the United States, the numbers were 2.29 percent and 0.74 percent, with the more open economies again growing at higher rates.

I could go on. I could mention that countries that adopted freer trade policies between 1950 and 1998 experienced higher growth and investment rates than they did pre-liberalization. I could write about the fact that older, more established firms (you know, the ones tariffs would likely serve best) are net job destroyers, while firms less than five years old are net job creators. I could riff on the false notion that high tariffs were the cause of high growth in the late 19th century. I could cite study after study that shows that freer trade leads to faster growth for every country involved. Heck, I could even make the argument that freer trade leads to happier populations.

But I think I’ve made my point. Trade is good. No, trade is amazing. Sure, it causes some reconfiguring of the American economy, but that has made us incredibly wealthy.

You, the Trade Skeptic, may remain unconvinced, and I’m comfortable with that notion. After all, it can take dozens of contacts with an idea before we become comfortable with it. But the evidence is clear, convincing, and overwhelming in support of free trade.

So, let’s not start a trade war with ourselves, alright?