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Forget the Trade Deficit!

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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. Except in the most trivial sense, there’s no such thing.

Adam Smith, that Scotsman who knew a fair bit about political economy, which for him was a branch of moral philosophy, said: “Nothing is more absurd than this doctrine of the balance of trade.” That was correct in 1776. It is correct today. Economists have demonstrated this point a million times.

Let’s try 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, or any other group. I trade with you. You trade with me. (That’s the song Barney should sing.) Smith trades with Jones. And so on. Individuals trade with individuals. Even when individuals trade with or as a group, such as a corporation, it is a meaningful grouping that itself is the result of trade. (We will see below that the groups counted in the trade statistics are arbitrary.)

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 surrendered. Third fact: each comes out ahead; that is, each garners a trade surplus.

Actually, these are but one fact stated three ways. We know these facts to be absolutely true because were they not true, the exchange would not have taken 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 even if he weren’t.) No kid who exchanges a candy bar for a Ken Griffy Jr. baseball card thinks he prefers the candy to the card.

That is a nearly exhaustive description of all voluntary exchange. The rest is elaboration and footnotes. In other words, nothing changes when the subject turns to international trade. Nations do not trade with each other. Nations are collections of people who happen to live under the jurisdiction of the same national government. They do not act in concert in their economic affairs.

National trade statistics are nothing more than arbitrary aggregations of many separate acts of exchange. Arbitrary? Indeed: if tomorrow Japan became the 51st state, we would no longer be aware of any trade deficit or surplus involving it and the United States. Does the boundary between Detroit, Michigan, and Windsor, Ontario, make any difference to the residents of those cities, except for any obstacles governments create? Who knows what the trade picture is between Maine and New Jersey? Who cares? I don’t either.

If it makes sense to worry about the deficit between the United States and Japan, then maybe we should worry about the deficits among the states. But why stop there? Maybe Philadelphia has an intolerable deficit with Toledo that we’re not being told about it. Neighborhoods can have deficits too. Come to think of it, I have a huge deficit with the corporation that owns my favorite supermarket. I spend a couple hundred dollars a month there, but that corporation buys nothing from me. On the other hand, I rarely purchase things from the people who do buy from me. Are we wrong not to worry about these bilateral deficits? Would it make sense to strive to have all bilateral trade relations balance out?

The fact is, if the balance of trade doesn’t matter at the personal, neighborhood, or city level, it doesn’t matter at the national level. Adam Smith was right.

But the Wall Street Journal reported that our trade deficit in February reached $12.11 billion. And larger deficits loom. 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 their imports. Would it be better if we got poorer and less able to buy products from abroad? I don’t see it.

Of course, if non-Americans are on hard times and have to cut back, it will affect Americans in some way. American businesses that find they have fewer sales in Asia will just have to do what they would do if they found 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 trade ledger always balances. If it doesn’t, something has been left out. The February deficit was for goods and services, the merchandise account. Americans all told bought $12.11 billion more in goods and services from non-Americans than non-Americans bought from Americans. Okay, so now the nons have $12.11 billion in cash that they haven’t exchanged for American-made stuff. Let’s imagine the “worst” case: the nons stuff all those federal reserve notes in their mattresses. What then? By taking money out of circulation and reducing the demand for products and services, they make the rest of us better off. We will see prices gently fall and will be able to buy more or buy things we couldn’t afford before. We will be richer. (What’s wrong with exchanging fancy green paper for useable products anyway?)

Any steps government takes, such as using tariffs or quotas to force Americans to buy fewer imports or subsidizing exports, would be self-defeating, not to mention a violation of our liberty. Besides, consumer desires 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 wait! 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 buy stocks and bonds. That means it will be put to work where the return is expected to be the highest. Guess where that is these days. (Hint: the Dow broke the 9,000 barrier some months ago.)

Non-Americans could trade their American currency on the international exchange markets. A Japanese businessman might trade his dollars for yen, since he can’t buy dinner with dollars at home. But there is nothing to worry about there. Whoever he trades the dollars to will face the same choices he faced: buy American-made goods and services or invest in productive ventures. If there is a demand for dollars, Americans need not lose sleep. (Of course, fiat national currencies under government control bring their own problems and should be abolished in favor of free banking and free-market money.)

The upshot is that the trade picture for an arbitrary period between two arbitrarily combined groups of people tells us nothing meaningful. It surely does not indicate how “the economy” is doing. There have been both surpluses and deficits during depressions. A big merchandise deficit is entirely consistent with a thriving economy. As people in a particular country grow wealthier than others, they may well purchase many more imports than the people in other countries do. That cannot be a bad sign. No matter how you slice it, the trade deficit is baloney.

All individuals need economic freedom. Trade restrictions are never justified. An environment of freedom is the best way to ensure that people become as prosperous as possible. It is also the only way they can enjoy the right to life, liberty, and the pursuit of happiness, which still matters not only to Americans but to people the world over.

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!

Mr. Richman is senior fellow at The Future of Freedom Foundation and editor of The Freeman magazine.

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    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.