Explore Freedom

Explore Freedom » Forget the Trade Deficit!

FFF Articles

Forget the Trade Deficit!

by

Memo to newspaper editors: Stop publishing stories about the trade deficit. You are needlessly worrying people about something that means absolutely nothing. Forget the trade deficit. There’s no such thing.

Adam Smith, that Scot who knew a fair bit about political economy, said: “Nothing is more absurd than this doctrine of the balance of trade.” Economists have demonstrated this a million times.

Once more, shall we?

In trade matters, as in so much else, no two words are more misleading — even dangerous — than “we” and “they.” We do not trade with them. The United States does not trade with Japan or Mexico. I trade with you. You trade with me. Individuals trade with individuals.

When two people trade with each other, there are facts that we can be absolutely sure of. First fact:each wants what the other gives up. Second fact: each places a higher value on the thing obtained than on the thing given up. Third fact: each garners a trade surplus. Actually, that’s really just one fact. We know it to be absolutely true because were it not, no exchange would take place.

Everyone knows this at the “micro,” one-on-one level. My 10-year-old son, Ben, knows it perfectly well. (Okay, he is exceptionally bright, but he would know it anyway.) No kid who exchanges a candy bar for a Ken Griffy Jr. baseball card thinks he wants the candy more than the card.

Nothing changes when the subject turns to international trade. Nations do not trade. They are collections of people who happen to live under the jurisdiction of the same national government.

National trade statistics are nothing more than arbitrary groupings of many separate acts of exchange. Arbitrary? Indeed: if tomorrow Japan became the 51st state, we would no longer be aware of any U.S. trade deficit with it. Who knows what the trade picture is between Maine and New Jersey? Who cares? I don’t either.

But the Wall Street Journal reported that “our” trade deficit in February reached $12.11 billion,with bigger ones ahead. Surely that means something.

Even in conventional terms, the deficit increase, at worst, means that the economic problems in Asia are prompting people there to buy fewer imports. Since Americans are in relatively good shape, they are not curtailing imports. Would it be better if we were poorer and less able to buy? If American businesses find they have fewer sales in Asia, they will just have to do what they would do if they had fewer sales in America: adjust. This isn’t rocket science.

But even this gives too much credit to the preoccupation with trade statistics. As an accounting tool, the full trade ledger always balances. If it doesn’t, something has been left out. The February deficit was for goods and services. All told, Americans bought $12.11 billion more in goods and services from non-Americans than non-Americans bought from Americans. Okay, so the non shave $12.11 billion in cash that they haven’t exchanged for American-made stuff. Let’s imagine the “worst”: the noons stuff all those federal reserve notes in their mattresses. What then? By taking money out of circulation, they reduce demand and let prices fall. Everyone else gets richer.

Some people might find that their products are not as much in demand as before and will have to do other work. Pardon me, but that is an ever-present feature of life. Anyway, consumer wants are unlimited. In a free economy, we need not fear we will run out of things to make. The Garden of Eden is not imminent.

But the nons are not going to stuff the money in mattresses. They won’t even take it home. They will leave it in their U.S. bank accounts or otherwise invest it. And that means it will be put to work making new products and services where the return is expected to be the highest. Guess where that is.

For the million-and-first time: nothing is more absurd than the doctrine of the balance of trade.Spike the trade-deficit stories, dear editors. Give us more scandal!

  • Categories
  • This post was written by:

    Sheldon Richman is vice president of The Future of Freedom Foundation and editor of FFF's monthly journal, Future of Freedom. For 15 years he was editor of The Freeman, published by the Foundation for Economic Education in Irvington, New York. He is the author of FFF's award-winning book Separating School & State: How to Liberate America's Families; Your Money or Your Life: Why We Must Abolish the Income Tax; and Tethered Citizens: Time to Repeal the Welfare State. Calling for the abolition, not the reform, of public schooling. Separating School & State has become a landmark book in both libertarian and educational circles. In his column in the Financial Times, Michael Prowse wrote: "I recommend a subversive tract, Separating School & State by Sheldon Richman of the Cato Institute, a Washington think tank... . I also think that Mr. Richman is right to fear that state education undermines personal responsibility..." Sheldon's articles on economic policy, education, civil liberties, American history, foreign policy, and the Middle East have appeared in the Washington Post, Wall Street Journal, American Scholar, Chicago Tribune, USA Today, Washington Times, The American Conservative, Insight, Cato Policy Report, Journal of Economic Development, The Freeman, The World & I, Reason, Washington Report on Middle East Affairs, Middle East Policy, Liberty magazine, and other publications. He is a contributor to the The Concise Encyclopedia of Economics. A former newspaper reporter and senior editor at the Cato Institute and the Institute for Humane Studies, Sheldon is a graduate of Temple University in Philadelphia. He blogs at Free Association. Send him e-mail.