The Concise Guide To Economics
by Jim Cox
29.The Trade Deficit
There is no such thing as a trade deficit. The nature of trade is such that each party will make an exchange only if the good received is of greater value to the trader than the good surrendered. Therefore, all trade generates a surplus; each party gains from a voluntary transaction. The theory of the trade deficit is a misapplication of accounting to economic theory.
In accounting, everything must balance or be equal. For instance, if a firm buys office supplies for $100 it will record the transaction as a debit (or increase) of $100 in its Office Supplies account and as a credit (or decrease) of $100 in its Cash account. Obviously, the only reason the firm would make such a purchase is if it prefers the office supplies to the cash.
Unfortunately, this perfectly valid accounting practice has been used in such a way as to obscure the underlying economic phenomenon occurring. With this correct understanding, the trade deficit becomes a non-issue, a meaningless--and false--statistic.
Further, historically the U.S. economy has enjoyed prosperity during the most significant trade deficits recorded and has suffered bad times during the largest trade surpluses recorded--in other words, the exact opposite one would expect if the trade deficit were a valid economic statistic warranting concern. The prosperous 1980's showed a growing trade deficit and the most recent trade surplus occurred when the U. S. was experiencing the 1974 - 75 recession. Before that, a trade surplus occurred during the Great Depression of the 1930's. A trade deficit was also the norm during the first 150 years of this country's history--a period of tremendous economic growth.
One has to be grateful that trade statistics are not kept between individual states or the eastern and western U. S., for surely one of these designated groups is at all times experiencing a trade deficit! If such statistics were tracked, politicians and special interests would bemoan the fact and attempt to direct government policy to remedy them, in the process robbing the average citizen to the benefit of the special interests.
Recently, the hysteria over this phony trade deficit has directed its wrath at Japan. And sure enough, the Japanese have been running a trade surplus with the U. S. What this means in actual reality is that the Japanese have been working to produce goods for Americans at a faster total rate than Americans have been working to produce goods for Japanese. Does that really sound so bad? If so, you are more than welcome to create a massive trade surplus with this author--send the goods on, and I promise not to reciprocate.
But further still, the trade statistics for 1990 showed a value of goods from Japan to the U. S. of $93 billion and a value of goods from the U. S. to Japan of $48 billion--a trade deficit for the U. S. with Japan. But hold on. The U. S. population is 250 million while the Japanese population is only 120 million. Therefore, each Japanese is in fact buying more American products ($400) than each American is buying Japanese products ($360). Even by their own standards, there can be no remaining gripe with the Japanese by those so inclined.
The trade deficit deserves the same treatment from the economics profession as the theory of the just price, mercantilism, and the labor theory of value--total repudiation.