For my entire life, I’ve heard the term trade deficit to reflect a situation where my country imports more things than it exports. The country has, for seemingly ever, identified this as a problem to be tackled in one way or another. Even if a politician doesn’t propose a tariff or other measure to combat the deficit, they recognize that it’s a suboptimal situation.
I have recently been finding that a weird take. The point of having money is to convert that money into things (eventually, anyway). Why stop other countries from sending us their things? That’s the goal. We get to have all the things instead of sending things to other people. Sure, they have money, but we have TVs and clothes and furniture, they need to convert that money back into the things they want like TVs, clothes and furniture.
Economists always talk about free trade being ideal, but I don’t often hear them talk about the benefits of a trade deficit, but here is Milton Friedman on that topic, in 1978 (from the middle section of the lecture).
I’d like to hear your thoughts on the topic, both as to whether it’s correct to say that a trade deficit is the “proper objective for a nation”, and as to why it’s become normal to act like a trade deficit is a looming disaster.
There is no intrinsic economic problem with nation having a ‘trade deficit’ provided that the domestic ‘productivity’ (in economic terms, fiscal yield) exceeds the value of imports. In fact, every empire that ever existed was fundamentally based upon having a massive trade deficit between the dominant country and its ‘possessions’ (and when that became untenable they typically resolved it by making the colony pay for extracting its own resources and sending them back to the mother country at its cost to ‘balance’ the ‘trade’). On a personal level, you have a trade deficit with your grocer, your barber, your gardener, your plumber, and essentially every other good and service you depend upon because the only thing you have that they want is your money. Unless you live in a barter economy, trade deficits are a natural consequence of trading partners with differential levels of wealth and domestic productivity. That there is an essential lack of egalitarianism in that difference is another issue (and one not likely to be solved in this lifetime) but I don’t think anybody wants their country to be reduced in gross domestic product to the level of the least of its trade partners in order to ‘balance’ trade.
There are economic and national security problems with specific types of trade deficits, specifically essential goods that could be curtailed by logistical interruptions (transpo worker strikes, fuel cost increases, natural disasters) or political disagreements where one party uses their position as ‘the only game in town’ to exercise leverage against others. The current US trade dependence upon TSMC to manufacture sub-10nm and high performance mobile microchips, or China for melt-blown polypropylene respirator masks, or various foreign sources for high grade uranium ore are all fundamentally economic and national security issues that are a consequence of some mix of fiscal policy, industrial development, and the distribution of natural resources. There are also externalities that economics generally ignores; if you offshore your carbon emissions for industrial production of steel to another country in order to meet domestic emissions requirements, all you are really doing is increasing those emissions elsewhere on the same planet in which the atmosphere is a common resource and carbon dioxide rapidly mixes in global quasi-equilibrium.
The reason that certain people rail upon trade deficits is that they believe they should get something for nothing; that is, they should be able to import whatever they want, and then get all of that money they paid out back by exporting something of essentially no real value in exchange. Try that out on your next trip to the dentist!
Already forgotten in the torrent of Trumpisms is his early citing of the McKinley presidency and the larger Gilded Age as a golden age that he wants America to return to, I guess because it was “great” then.
In the late 19th century, America was growing and industrializing faster than any other country. It would soon overtake Britain and Germany in many industries, such as steel production. But many goods still had to be imported and many impeded the growth of newly-born American industries. Enter then House member’s William McKinley Tariff of 1890.
On this date, the McKinley Tariff of 1890 became law—boosting protective tariff rates of nearly 50 percent on average for many American products. …
President Benjamin Harrison convinced Senate allies to insert a provision permitting the President to raise duties to match foreign rate hikes and to sign agreements to open foreign markets without congressional approval.
The wealthy first became fabulously wealthy during the Gilded Age. Virtually no federal laws prevented them from doing anything they wanted. The anything that they did would almost universally be illegal today, but that required a century of revulsion to their excesses. Remove the revulsion and anything might again be possible to the benefit of fabulously wealthy. That the industries prospered only because of millions of despised immigrants must also be forgotten, along with all the other changes in the economy, the government, and society since that time.
It’s snake oil. Pick out all the good cherries and ignore the rotten ones and tell the suckers what a great grower you are. The results will again be devastating.
I do not know how old you are, but I’m 70, and do not recall that. Some past politicians were anti-trade-deficit mercantilist types, and others are more sensible.
I just googled the three words trade deficit reagan, and here’s the first link returned:
I am not 70, but at 55 I have never heard this either. To me it is only the Republican Party under Trump that has had this opinion. And it is a stupid opinion at that. As the world’s petro currency, it greatly benefits us to send the money we print abroad to receive tangible stuff in return.
Checking online, the trade deficit is about 3% of GDP, but in the early 2000s it was closer to 5% of GDP. I have no idea if that is a good thing or a bad thing.
The bad thing about trade deficits is that they’re (probably) not sustainable in the long term, and it’ll be hard when they end, which will probably happen eventually.
The solution to this is to make plans for their ending, and try to ensure that they (eventually) end as gracefully as possible. The solution is not “let’s end them as quickly as possible, immediately, without any planning”.
The administration’s policy is analogous to “We’re flying really high. Flying is dangerous. Let’s nosedive into the ground, so we’re not flying any more.”.
Again, this is not true. As long as domestic productivity—the amount of monetary value—exceeds what is being spent to bring in foreign goods, there is no reason a trade deficit cannot be maintained indefinitely. The notion that all trade between each partner needs to be ‘balanced’ such that trade is a zero sum game assumes both no net productivity and ignores the complexity of real world economic activity; it is a (poorly formed) microeconomics view of the complicated world of global trade and industrialization.
Now, there are specific causes of trade deficits, such as the offshoring of jobs or loss of capability to produce critical goods domestically, which are problematic but that isn’t an effect of a trade deficit, it is the cause. And as @Happy_Fun_Ball notes, it is actually beneficial (to the United States, certainly) to have American dollars being ‘exported’ for real goods and commodities, as it makes other nations using the dollar—even those not aligned with US interests—implicitly invested in the stability of the dollar and its use as a global reserve currency as well as the security of international trade.
The US has a $235 million trade deficit with Lesotho, mainly because they make the bluejeans that we wear. Lesotho is an impoverished country so they don’t import many of our goods since they can’t afford to. I fail to see how this is “suboptimal”, but Trump saw it as such and imposed
a imposed a 50% tariff on this country. That isn’t good for anyone.
It doesn’t matter if there is a trade deficit between the US and say China. What matters is the global balance of trade. Just like it doesn’t matter if you have a trade deficit with your doctor.
Services are part of a trade deficit. So, it’s asininely simplistic to only calculate physical goods.
trade wars are not easy to win
trade deals take a long time to hammer out, and there are always unintended consequences that typically bite one in the ass