[Welcome to our annual Guest Writer Series, a time in which we are intentional in listening to other voices. Know that AR may/may not agree with the perspective expressed. Know, too, that agreement is secondary to learning from others. Meet Guest Writer #2!]
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Performance measurement is ubiquitous in the business world. Companies understand that if an objective is quantified, monitored, and made visible, the objective is more likely to be accomplished, especially if incentives are tied to the metric. Obviously, it is vital that the metric being incentivized is aligned with the desired objective.
The current thinking of some of our nation’s leaders is to focus on our trade deficit as an indicator of how well our economy is doing. The term sounds scary. It suggests that bad activity outweighs the good, so it is urgent that we fix it! In reality, the trade deficit is a meaningless metric.
If a country exports more than it imports (in terms of whatever currency it uses), it is said to have a trade surplus. If imports exceed exports, it has a trade deficit. This terminology implies that net exporting is always and everywhere a positive. That is simply not the case.
The United States has a trade deficit because we import more than we export. In fact, we have the largest trade deficit in the world by far. Do you know why we can afford to buy so much more than we sell? BECAUSE WE ARE THE RICHEST COUNTRY ON EARTH!! That’s why! We would not want to trade places with anyone else.
Companies in other countries give us their goods and we give them dollars, which they can use to buy other items. American companies sell products to those in other counties and in return receive dollars or foreign currency. It is because we are so wealthy that we can import so much more than we export.
China has the largest trade surplus in the world. China also has a much higher percentage of its population who are peasants. Would you rather live in China or the USA? That’s what I thought.
Let me try another approach…imagine there are three neighboring countries: Agritopia, Industriland, and Servicestan. The GDP (gross domestic product) of each country is $3 million. In other words, their economies are exactly the same size.
Agritopia grows corn, wheat, and other farm products. They sell $1 million worth of food to Industriland, $1 million to Servicestan, and consume $1 million themselves.
Industriland produces all sorts of manufactured goods. $2 million of it is sold to Servicestan and $1 million is used domestically.
Servicestan does not make any goods, but they do excel at personal services. Their citizens cut each other’s hair, give manicures, and treat skin to constitute a $3 million economy. (They are much better groomed than their neighbors.) Servicestan has no exports.
So, let’s calculate the trade balance for each county:
- Agritopia – $2 million exports minus zero imports = $2 million trade surplus
- Industriland – $2 million exports minus $1 million imports = $1 million trade surplus
- Servicestan – zero exports minus $3 million imports = $3 million trade deficit
Oh my! It looks like Servicestan is in trouble. Maybe they should stop importing so much manufactured goods, but would that make them better off? They could also reduce their trade deficit by discontinuing importing food, but then they would starve!
The fact is, there is nothing wrong with having a trade deficit. In the example above, the economies of all three countries are equally strong. I could even make the case that Servicestan is the best off, as they enjoy consuming the most and a greater variety of goods and services. Regardless, the trade deficit figure is irrelevant.
Now, it is annoying when some countries place tariffs on goods we try to export. That makes American producers worse off. I would argue it’s best not to respond with reciprocal tariffs, thereby increasing the price of imports, because that makes American consumers worse off! Ostensibly, our recent raising of tariffs was a bargaining tactic, so that we might make a deal to eliminate all tariffs.
However, that is not how the original “Liberation Day” tariff rates were calculated. The individual rates were based on — you guessed it — our trade deficit with each country. Allies like Israel who lowered their tariffs on imported goods from the U.S. to zero, were still assessed a 17% tariff. Amongst the highest tariffs was Vietnam at 46%. We enjoy inexpensive electronics, machinery, and clothing made in Vietnam. Vietnam does not buy our goods at a commensurate level because, well, they’re relatively poor compared to us.
Perhaps calling the trade deficit meaningless goes too far. The term does have some meaning. It just doesn’t have the significance that some people associate with it. Maybe we should just rename it to something like “net exports.” Using the word ‘deficit’ makes “trade deficit” sound analogous to our federal “fiscal deficit,” which truly is unsustainable and will bankrupt us if it continues year after year. To the contrary, our trade deficit could go on forever, and we would be just fine. Meaningless or not, the trade deficit is harmless.
Respectfully…
FAH