April 10, 2018
"SIMPLY WRONG"
How Trump Misunderstands Trade (Veronique de Rugy, April 10, 2018, NY Times)
The notion that trade deficits are always bad for the economy is based on several fundamental mistakes. The first mistake is the assumption that trade is a zero-sum game, suggesting that the country selling products abroad is a winner while the one who buys is a loser. That's simply wrong.Think about your own experience. Without ever worrying about it, we run up trade deficits on a daily basis with many merchants. When you shop at the grocery store, enjoy a drink at your favorite bar or get your hair cut, you run up a personal trade deficit with your grocer, bar and hair stylist. Do they ever buy anything from you in return? When you get paid by your employer, he runs up his trade deficit with you. Do you buy as much from your employer as he buys from you?These examples illustrate how trade deficits with other economic entities are almost always nothing to fret about. They're unavoidable consequences of the specialization and trade on which our modern prosperity depends. To be sure, on rare occasions trade deficits are symptoms of underlying dysfunctions, but they are never themselves a cause of these dysfunctions.
Even if we were to ignore the counsel of nearly every economist and blindly accept the notion that a United States trade deficit with the rest of the planet is undesirable, it would still be completely untrue that a deficit with any single country is undesirable. In this world of nearly 200 countries, bilateral trade deficits are as unavoidable and as economically meaningless as your trade deficit with your grocer. If America's overall trade deficit were balanced, we'd still have deficits with some countries and surpluses with others.More generally, we mustn't forget that the American dollars we spend on imports eventually return to America, either by foreigners purchasing American exports or making investments. Protectionists like Mr. Trump always complain about the United States' trade deficit for goods but mention neither the surplus of foreign investment capital that we get nor our trade surplus in services.Here's how it works: The American dollars we use to buy imports are of little use to foreigners outside our borders. They are, however, of great use to foreigners who want to invest within the United States. And that's what happens with the dollars that aren't spent on American exports.Foreign investment is key to our economic growth here at home. In other words, we Americans win when we get to buy the stuff we want from abroad and when those dollars are pumped back into our economy.
Posted by Orrin Judd at April 10, 2018 1:14 PM