Worrying About the ‘Trade Deficit’ Is Absurd to the Nth Degree

Cafe Hayek ^ | January 6, 2017 | Don Boudreaux

[alexander_busek]

Simple refutation: The article's example involved "N" Americans and "non-N" Americans. But these two groups both use the same currency (U.S. dollars), and don't care about the relative "worth" of dollars versus other currencies (British pounds, Euros, Rubles, etc.). Instead, they use U.S. dollars, the value of which they collectively (through their common govt.) fix - e.g., by "firing up the printing presses" or not.

In the real world, the U.S. and its trading partners use different currencies. When they use the same currency (e.g., petrodollars), it is by voluntary agreement - which could be revoked at any time.

Even in the case of "N" Americans and "non-N" Americans, the system functions only because both groups agree that dollars have a stable value. Thus, if the "non-N" Americans suddenly stopped accepting dollars (e.g., because they had lost "faith" in them), and instead demanded, e.g., GOLD, the system would collapse.

Regards,

[FreedomNotSafety]

Most people on this forum are only concerned about visible manufacturing jobs mostly in heavy industry or durable goods. Those jobs are declining no matter what we do. They are even declining in China. By the logic found on this forum, at times, if I could establish a banana plantation here and hire American workers and pay them “good wages” and give them “good work” then I should be protected from competition.

The fact is a banana is not worth the price it would take to support a viable US banana growing industry. No one in this country would work for the amount of money it would take to produce a banana cheap enough that a US consumer would buy it.

[Jarhead9297]

The trade deficit is overhyped. A lot of people are ignorant to the fact that if a foreign entity invests money in the US that goes against our trade deficit. And this is a bad thing?

[Alberta's Child]

In the real world, the U.S. and its trading partners use different currencies.

This isn't really true. We only trade with partners who use currencies that can be converted into U.S. dollars, and we conduct business in U.S. dollars. The Indian rupee, for example, is completely worthless here in the U.S. and therefore is only accepted in trade by a U.S.-based company that can use rupees in India.

This is another reason why the U.S. has a trade deficit with most of the world. Our currency is worth far more to most countries than theirs is to us.

[FreedomNotSafety]

Just posted an article about the 95 mil. Worth the short read despite being from CNBC.

[Alberta's Child]

Exactly.

Manufacturing is actually a very flexible industry because it can be located almost anywhere with fewer geographic constraints than other sectors like agriculture and mining. You can't open a gold mine in a place that has no gold ore under the ground, and you can't grow wheat (naturally, at least) in the Sahara Desert.

[alexander_busek]

This isn't really true.

Most of what I wrote is not strictly true. I've had to overgeneralize and also skip a lot of details.

My point is that the U.S. government does not decide how many Indian rupees are to be printed on any given day. In that sense, the currencies (while exchangeable - at a variable rate, which can plummet at the drop of a hat) are different.

Regards,

[alexander_busek]

This is another reason why the U.S. has a trade deficit with most of the world. Our currency is worth far more to most countries than theirs is to us.

Because those other countries, for the time being, believe that our currency is more valuable.

That belief fluctuates on a daily basis.

On any given day, any number of different state actors could "decide" (on a whim) that the dollar suddenly wasn't worth as many rupees, or Euros.

If other state actors viewed that as a "buying opportunity" - no harm, no foul.

If, however, they, too, suddenly got scared, and likewise began dumping their dollar-denominated assets, this would act as a positive feedback cycle - then good-bye Charlie!

Regards,

[TwelveOfTwenty]

This was a very poor defense of free trade. We may run a deficit with the local store or some guy named "N", but we make that up with what we make when others pay us. If we make more than we pay out overall, then we have money to invest. Otherwise, we run deficits and get buried in debt. That is exactly what has happened to us as a nation.

When we buy American, we create American tax payers that will pay into our infrastructure, military, space program, etc. When we buy foreign made products, we create foreign tax payers that will pay into their infrastructure, military, space program, etc, and dependents who will drain our tax revenue. I saw nothing in the article that addresses that.

To those who want to continue with our current free trade policies, I suggest this. Walk up to any Veteran you know, and tell them "I appreciate your service to this country, but if I have to choose between you having a job and saving $.10 on a foreign made paint brush, I'm saving the $.10 and I don't care if you can't find a job." Because that's the choice you're making whether you want to come out and say it or not.

[odawg]

“Interestingly, the nation with the largest trade deficit is usually the wealthiest one.”

Interestingly, the United States did not have these kinds of trade deficits until the “free trade” agreements. And, it was one of the wealthiest ones. Also, it was not losing factories by the tens of thousands. It was building factories by the tens of thousands.

[Pietro]

Rather than answer my question w/ 6 rhetorical, irrelevant questions, how about explaining the benefit of record low workforce participation.

[expat_panama]

...a very poor defense of free trade...

So poor in fact that it does not even mention 'free trade'.    All it seems to talk about is the silly so-called 'trade deficit'.  Ah well let's just talk about that.  Let's see, this trade deficit is bad becuase it comes with, well...

--and it's bad all by itself too!

Yeah, I'm making fun of all this trade deficit talk, and that's all there is to it because there's no way to actually see in hard numbers of jobs or money that it causes or even happens with.

  

   People here like to talk about factories.  Fine, everyone likes factory jobs.  OK so me and Rush Limbaugh make more money in services but y'all like to spend all day tightening bolts so lets work with that.  Here's what happens to those wonderful factory jobs when our trade deficit shrinks.

<---[click to enlarge]

 When the 'trade defect' shrinks the factories shut down and when it starts growing again factories go back to work.  Sure, it doesn't seem to make sense that our factories would do better when they compete w/ cheap foreign products but that's life --it doesn't always make sense but it does always have to be seen as it is.

[TwelveOfTwenty]

So poor in fact that it does not even mention 'free trade'. All it seems to talk about is the silly so-called 'trade deficit'.

A direct result of our poorly negotiated free trade deals.

Ah well let's just talk about that. Let's see, this trade deficit is bad becuase...

Because that money is funding China's infrastructure, military, and space programs instead of ours.

People here like to talk about factories. Fine, everyone likes factory jobs. OK so me and Rush Limbaugh make more money in services but y'all like to spend all day tightening bolts so lets work with that.

You probably make more than people in the military too. Are you going to ridicule how they spend their day?

That chart is confusing and doesn't show whether it accounts for population growth, inflation, or other factors. I'd like to see the numbers it's based on.

[expat_panama]

this trade deficit is bad because...

that money is funding China's infrastructure

Sounds fun to say but let's think about it a bit. 

Trade deficit.  We buy Iphones w/ dollars.  Made in China.  Are we saying that the dollars we spent on the Iphones went to China and the Chinese bought their infrastructure w/ U.S. dollars?  Really?  There's somewhere in China where they can buy all the infrastructure they want with dollars?

Please work with me on this.

[FreedomNotSafety]

“...how about explaining the benefit of record low workforce participation.” Do you believe record low workforce participation is a benefit? If not then your question was rhetorical or just argumentative. Either way you got a good rhetorical argument in response.

But if you can explain the benefit then I will stand corrected.

[TwelveOfTwenty]

Which part do you need work with? The part where the Chinese workers are being paid to build iPhones, or the part where those workers pay taxes that fund their infrastructure instead of ours?

[odawg]

“When the ‘trade defect’ shrinks the factories shut down and when it starts growing again factories go back to work.”

All hail the trade deficit. Without it, the 95 million unemployed we have now would have been, say, 120 million.

No offense or anything, but you are insane.

[Pietro]

Obviously, it was satiric.

Low workforce participation benefits no one and it is a result of our manufacturing base being shipped overseas.

A terrible trade imbalance is not the problem, it is a symptom of the problem.

[ModelBreaker]

“The trade deficit is overhyped. A lot of people are ignorant to the fact that if a foreign entity invests money in the US that goes against our trade deficit. And this is a bad thing?”

In that case, we are exchanging Chinese ownership of US assets, land, companies for cheap stuff from China. Two points:

1. We are addicted to the fact that we are the world’s reserve currency and the dollar is the currency in which the Saudi’s accept payment for oil. So we can just “print” money to cover our deficit (I know, it’s oversimplified but essentially true). It’s far cheaper to print money than make stuff. So our international comparative advantage (in econ terms) is in printing dollars. Result, we stop making stuff and print dollars under basic economic theory.

2. Free trade is not bad. But when one party tends toward free trade (the US) and the other is aggressively merchantilist (China), that only emphasizes the dollars for stuff problem—and it is not free trade, it is asymmetric trade on asymmetric terms.

Losing the ability to make real stuff and assigning it over to a probably geopolitical enemy and giving them ownership of large portions of our assets has non trivial consequences.

[riverdawg]

The shipping container also decimated the longshorsmen’s unions and dramatically increased US port efficiency.