07/11/2018

The "Trade Deficit" Isn't A Problem, But It Shows A Problem

Nathan Lewis, Forbes.com

Trade issues have again come to the forefront, and with them all the same old arguments that haven’t changed much over the decades. I want to take up the topic of trade, and trade-related issues, without treading the same old ruts that are not very productive today.

Not to be too coy about it, I am mostly on the free-trade side, but I think that the “economic nationalists” have some valid points that should be discussed. However, these valid points typically come wrapped in a series of tired old fallacies, which the free-trader types justifiably dismiss.

One valid point, as I see it, is related to foreign competition, particularly competition from the world’s low-wage countries. Nobody seems to be terribly concerned about competition with developed Europe or Canada. Another valid point is the issue of floating currencies, which introduce arbitrary winners and losers. There are related issues regarding immigration and domestic investment and capital creation. The free-trader types mostly ignore all of these issues, instead repeating a series of learned nostrums in response to every situation. Even if we decide that free trade is a better solution, we should make that decision based on some investigation, rather than asserting that it must always be the best solution in every circumstance, because … it just is.

First of all: the “trade deficit.” This is more properly expanded to the current-account deficit, which includes both goods and services, and also net investment income. Commonly, a current-account surplus is perceived as “good,” and a current-account deficit is “bad.” This implies that countries are in an eternal war with each other – no country can run a “good” surplus unless another runs a “bad” deficit, by definition. But isn’t trade supposed to be mutually-beneficial cooperation? In other words – everyone’s a winner? Since all trade is undertaken voluntarily – each party in the transaction perceives itself to be better off – it would seem that trade must be mutually beneficial.

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