A “trade deficit” is the difference between the amount of money the citizens of one country spend on goods from other countries versus the amount or money foreigners spend on goods in return. There is no obvious reason why these two numbers should always be in absolute balance, or why it would be bad if they weren’t. Is the concept really meaningful?
I live in Dallas, Texas. Suppose I bought a toy at a store two blocks from me for $14. We each entered into a voluntary exchange. The owner offered to sell me the toy for $14, and I agreed to pay the owner $14 for it. For each of us, it was an example of Value Given for Value Received.
Do I have a “trade deficit” of $14? Does the store owner have a “trade surplus” of $14? Should the neighbors get involved with the trade? Do my neighbors have a trade deficit? Do the store owner’s neighbors have a trade surplus? The money was exchanged between two citizens, and not with the neighbors. In this instance, are the notions of a trade deficit or trade surplus meaningful concepts or are they utter nonsense. We are both satisfied with the trade, so does anything else matter? Does what anyone else think about it matter? Should I and the store be free to agree on our terms and conditions of the sale? Should there be government conditions such as a tariff or restrictions on the sale because the store is located two blocks away?
Now, suppose I bought that same toy from a company located in another state, say Oklahoma? Again, we have the same questions, expanded from the neighborhood to the state.
Now expand the exercise from the state to the country.
If you agree that the notions of a trade deficit or a trade surplus are meaningless concepts for me and the store, are they still meaningless for the block I live in, or the state I live in, or the country I live in? After all it’s my money, and not the neighbors’ or the state’s or the country’s.
The notion of a trade deficit is meaningless and is a bogus number used for political purposes not only to favor certain industries and companies, but to try to control the economy and impose more restrictions and taxes on the citizens.
A free market, domestically and internationally, is the only path to general prosperity. International trade is not mortal combat but a form of cooperation, a means of expanding worldwide production and knowledge. The benefits of international trade flow to both trading partners, even when one of the countries is more efficient across the board. This is the “Law of Comparative Advantage,” covered in every economics textbook. Free trade does not destroy but creates employment.
In addition, the workings of free markets do not depend upon boundary lines drawn on a map. The economic advantages of international commerce are the same as those of interstate, intercity, and crosstown commerce. And, as illustrated in the example above, if we kept crosstown trade accounts, the “trade deficits” that would appear would be as meaningless as are our international “trade deficits.”
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As you are probably aware, many discussions on this topic are sometimes unfriendly and contain logical fallacies. If you decide to leave a comment, or even outside of this post, if you decide to have a discussion, public or private, you might find it helpful to follow the suggestions on my post How to have a successful discussion.
Photo Credit
Exchanging cash for groceries: RDNE Stock project from pexels