The Truth About Trade Deficits

October 25, 2017

Trade Deficits

 There are 3 important pieces of misinformation that are typically spread when individuals discuss trade deficits.

 

​As part of his presidential campaign, President elect Donald Trump often lamented to voters that the United States ran trade deficits to China and other countries and that it was important to bring those jobs back to the USA. 

 

There are 3 important pieces of misinformation that are typically spread when individuals discuss trade deficits.
 

Trump promised Americans that, if elected, he would bring those jobs back to the American worker. 

 

What he and many others fail to understand is that trade deficits are part of a healthy economy and do not negatively affect the average worker. 

 

  Actually, on the contrary, they can help to improve the quality of living.

 

3 important pieces of misinformation 

 

The first error

 

is that in international trade, or any trade for that matter, there is a winner or loser.

 
The whole premise of trade is that it is a positive sum endeavor.
 
 
This means that both parties benefit in free trade.
 
 
For example, if you were to go into McDonald’s today, you would rather have their Big Mac than your four dollars and McDonald’s would rather have your money than their hamburger.
 
 
Because there are no outside forces pressuring the trade, both parties benefit.
 
 
In Adam Smith’s The Wealth of Nations, he discusses that free, positive-sum trade is what lifted us out of a system of mercantilism and raised our standard of living.
 
 
Trade is out ticket to a more productive, advanced, and prosperous society and it is important to remember that.
 
 

Another falsehood

 

often spread by today’s media, is that a trade deficit makes Americans less wealthy.

 

Both Clinton and Trump during their campaigns talked about unfair advantages present in China due to government subsidies.
 
 
They make the mistake of thinking that because the price of Chinese steel is being artificially lowered by Chinese citizens through taxation, American citizens are being short-changed.
 
 
On the contrary, Chinese subsidies benefit American companies by allowing them to purchase large quantities of Chinese steel for an artificially low price.
 
 
This allows the companies’ profits to grow and benefits consumers and employees.
 

Customers enjoy products that cost less due to international trade and employees’ wages and bonuses often benefit when their company does well.

 

A final misconception

 

regarding international trade deficits is that they cost American workers their jobs.

 

This misinformation is trickier because at first glance it seems to be true; American workers can lose their jobs due to foreign competition.

 

What many do not see, however, is that after losing their jobs to more productive foreign markets, these workers go on to create more value in other fields.

 

The United States’ economy used to rely on agriculture.

 

In the 1850’s, 60% of Americans worked as farmers, by 1920 that number had dropped to only 29%, and today, less than 1% of American workers are farmers.

 

Since 1850, have we seen a substantial increase in unemployment?

 

No!

 

Due to productivity enhancements, such as machinery, individuals can work in other, more specialized fields that create more value.

 

This same principle applies to international trade.

 

If another country can produce a good more cheaply than Americans, the individuals existing in that industry in the US can move to fields where they are more needed.

 

Increased productivity allows for higher standard of living by providing cheap goods and services and allows for further economic development by freeing up human capital.

 

The term trade deficit can seem negative, but a clear evaluation of its effects demonstrate how it can be beneficial.

 

Instead of being afraid of trade deficits, Americans should appreciate the positive results in a free economy.

 

Americans’ ability to purchase goods and services more cheaply, enjoy higher quality of living, and increase their value creation are all benefits of trade.

 

The next time someone laments about the trade deficit, Americans’ response should be, “so what?”

 

 By David Kirk

Posted in Economics and tagged , , ,