Sorry if this has been hashed out before (I don’t follow GD too closely) but does it really matter that much that each and every country buy and sell equal amounts with each country that they trade with? Should anyone care that we, for example, buy $900 million in goods every year from Ethnicistan but Ethnicistan buys only $500 million a year from us? Trump seems obsessed with it, but I don’t get why it is a big deal–you don’t have grocers telling the newsstand guy that they won’t buy a magazine unless he buys a gallon of milk.
I guess if it risks runaway inflation, where your nation’s currency become increasingly worthless because you’ve lost productivity or what exports you have become less valuable (i.e. your primary export is oil and oil prices drop)… hmmm, gotta give this one some thought. If OPEC wasn’t controlling (or at least heavily influencing) international oil prices, could the member nations slide into trade deficits and currency devaluation if:
- Oil prices fall significantly
- Their demand for foreign goods remains the same
- They cannot or at least have not developed local industry to meet the demand in (2)
I gather a diversified economy is the best defense - a country could tolerate a pretty high trade deficit without problems.
I think you nailed it with your grocer example. I’ve been running a trade deficit with every store I’ve ever bought from since my teen years. And yet I’m solvent. Trump’s understanding of this seems to leave out the goods and services that are changing hands.
On skimming the wiki page, I seethis quote from Adam Smith:
Even in 1776, Smith was scorning the notion that the side with the trade deficit was somehow the loser. Further, if the net effect of a trade deficit with China and Japan is those countries end up owning a lot of U.S. debt, well… when has owing people money ever been a concern of Trump’s? It’s a complex issue, but Trump sells it as a simple one, which I can’t imagine comes as a shock to anyone.
All trades that aren’t coerced are just that: trades. One thing exchanged for another of equal value. How can you have a deficit if both sides of the trade got something of equal value?
It’s better than that, even, because nobody buys something unless they value that item more than the money they spend on it; and conversely, nobody sells something unless they value the money they receive more than the thing they’re selling. So trade makes both parties wealthier than they were before the trade. It’s not just a simple breaking even, it’s actually a great benefit.
This zero-sum notion of trade also rests on the unstated assumption that you cannot create new wealth via manufacturing. If you buy a billion dollars worth of Chinese Steel, and turn that into two billion dollars worth of products, you’ve created wealth, even if you just sell those products to fellow citizens, and not to anyone in China. There’s a “trade deficit”, but you’re still ahead of the game after all the numbers are crunched.
A country having an overall trade deficit is probably a bad thing, but on an individual per-country basis, it’s nonsense to care about.
If the US buys $1 billion of vibranium from Wakanda, and we use it to manufacture and export $20 billion worth of indestructible toothbrushes to the rest of the word, who gives a crap if Wakanda doesn’t buy any? Sure the US could try and play hardball in order to force them to buy $1 billion of our other crap, to ensure we’re not running a trade deficit. And they can refuse, turn around and sell their $1 billion of vibranium to China instead.
Who stands more to lose in this scenario?
Exactly right.
We really need to make double-entry bookkeeping a standard part of high school curriculum. (I’d even replace geometry; it’s more important.) There are so many economic fallacies that are eliminated by understanding it.
Even this is not necessarily true. If a developed country only has a trade deficit involves importing raw materials from resource rich but overall poorer nations and otherwise has trade balance with all other nations, there’s nothing there that’s necessarily a problem. It could potentially be a problem but there’s no a priori reason it has to be. But that’s also true for the countries running large trade surpluses should that trade ever dry up.
Basically, trade surpluses and deficits aren’t inherently good or bad whether they are overall surpluses/deficits or with individual countries. The context always matters.
Should the U.S. buy steel from China? Or should we buy it from Pennsylvania, putting unemployed Pennsylvanians back to work, even if that steel is a little more expensive. All else equal, the Pennsylvania steel is better for the U.S., for sufficiently small values of “little.”
Serious question:
What steel mills? What steel workers, for that matter?
That area has been “the Rust Belt” for decades. Is there anything even close to the manufacturing capacity needed within the US? How long would it take to (re)build the steel mills, to train the workers? How many workers would there be, in a modern, largely automated factory?
I don’t know. My response was hypothetical, just using steel as an example.
I’ve read that the Trump Tweet about steel and aluminum tariffs came immediately after some steel and aluminum execs appeared on Fox TV, and in response to an election in the Rusty Pennsylvania.
If my use of steel as the example suggests that I might think something useful or intelligent has ever emerged from any of Trump’s orifices I do apologize for misleading you.
We should buy steel from China and have people in Pennsylvania do something else.
There’s the rub, isn’t it? “All else equal” is great in theory but never actually happens. The reality is there’s not a lot that is equal, so all sides can benefit from trade, even if that means trade deficits for some and trade surpluses for others.
One way to look at it (which is just a small piece of the whole economic puzzle) is that when we have a trade deficit we are sending dollars overseas in return for goods and services. As long as our economy stays large and diversified it’s actually a pretty good deal: we trade paper bills (or little bits on a database somewhere) for hard goods like cars, computers, and steel.
In macro economics it’s pretty rare that something is all bad or all good.
That’s not the right analogy for personal finances. The better local analogy is “I spent all my money at Amazon to save a few $$, so the store down the street isn’t there anymore. And now that the local shop is gone, their employees aren’t buying stuff in my shop.” Indirectly that is the grocer telling the magazine guy that is has to go both ways.
We’re still making steel, not as much as 1973, but still quite a bit.
We are, however, employing a lot fewer steel workers:
Even if we produced the amount of steel we did in the 70s, we would not be employing the numbers of workers we did then.
By raising the price of all of our steel products, we would likely be damaging steel using industries even more…
If that is that is the question – I’ll grant that the steel and aluminum tariffs will indeed benefit their executives.
Why? It’s not like American labor is intrinsically more valuable than immigrant or overseas labor.
This is an understandable view, but it’s short-sighted because steel is used to make things.
So firstly, it’s not just the cost of steel that increases, but the cost of a whole plethora of goods used by both industry and consumers. So the knock-on effects are potentially huge; likely orders of magnitude more than just paying all the former steelworkers to retrain into other industries.
Secondly it means many US exports will become less competitive, since US industry will be paying more for their steel, which may cost some jobs. So this idea may increase unemployment.