The Trade Deficit Myth

Every purchase we make is trade. We trade to improve our lives and trade occurs only when both parties benefit from the transaction. Individuals and companies engage in trade; countries do not trade, as countries are just geographic areas with political boundaries.

The term “Trade Deficit” causes a lot of confusion and implies that one country is in debt to another country. This is not the case.

The “Trade Deficit (or Surplus)” used to be called “The Balance of Trade.” I do not know when or why the name was changed, but one possibility is that “trade deficit” sounds more ominous and gives the government a chance to address a problem that doesn’t exist. The following examples apply the typical definition of trade deficit.

Assume you are a programmer and work for a construction company. Your employer has a huge trade deficit with you; that is, your employer buys all of your work, but sells you little or nothing. You probably have a trade deficit with your grocer; you purchase from the grocer, but your grocer has no need for your programming skills and does not purchase anything from you.

Similarly, the people of Massachusetts have a trade deficit with the people of Florida when it comes to oranges and the people of Florida have a trade deficit with the people of Massachusetts when it comes to cranberries. We do not give a second thought to these trade deficits. Since all of the examples occurred within the U.S., the Bureau of Economic Analysis would not report a change in the U.S. trade deficit.

Let’s take it a step further.

A Honda dealer sells 50 cars and needs to replenish inventory. It orders 50 vehicles from Honda Japan (HJ) and wires $1 million dollars to pay for the vehicles. The Honda dealer has a trade deficit with HJ and the U.S. reports a trade deficit with Japan.

HJ has U.S. dollars that it needs to use. HJ can use those dollars to purchase components for cars. If it purchases components from a U.S. manufacturer, HJ has a trade deficit with the component manufacturer and the U.S. trade deficit with Japan goes down. If HJ purchases components from Korea or China using dollars, the U.S. trade deficit with Japan does not change, but now Korea and China have U.S. dollars that they need to use.

If HJ uses the $1 million to purchase land for a plant in Texas, the U.S. trade deficit with Japan does not change. This type of transaction is not included in the calculation of trade even though HJ purchased a U.S. “product.”

Government action to lower the trade deficit through tariffs or import quotas (e.g. sugar), hurt the consumer. In the 70s, Americans started buying Hondas, Datsuns/Nissans, and Toyotas. These cars were cheaper and more reliable than American vehicles. The Federal government could have imposed steep tariffs on these vehicles, but to what benefit? Purchasers of these vehicles would be worse off because, after tariffs, the exact same vehicle would cost more. The intended beneficiaries, U.S. automakers, were not meeting customer expectations and were losing market share. Tariffs would have forced some consumers to purchase a U.S. vehicle, but the tariffs would have prolonged the inefficiency of the U.S. manufacturers.

If foreign companies can produce an equivalent product for less money, consumers benefit. Foreign trade may result in some manufacturing jobs lost to foreign companies. However, jobs at companies that import and distribute products increase, offsetting the domestic manufacturing jobs lost from imports. Additionally, with lower prices on imported goods, consumers have funds available for other purchases, creating jobs in those industries.

At times, governments subsidize exports (think Ex/Im Bank). In essence, they are taxing their own citizens to the benefit of the export company and the foreign purchaser of the product. If China is subsidizing its exports, it is similar to giving a gift to the purchasers of those exports. Candidates proposing to impose steep tariffs on imports are hurting consumers in an attempt to help inefficient businesses. Trade is about individuals making the best choices for themselves. Free trade keeps the customer the king.

One reason the reported trade deficit keeps growing is that foreign entities use those dollars to bankroll the National Debt/Annual Deficit rather than purchasing goods and services. When the government runs a deficit, the government has three choices: increase taxes, print money, or borrow money. The first is out of the question. The second can be used for a short period, but eventually the taxpayer feels the pain of price inflation. The third is the easiest option, especially when there are eager lenders. Maybe reducing the size of the federal government and its need to borrow would lead to “balanced” trade.

Thomas Nichta lives in San Antonio, Texas.

Every purchase we make is trade. We trade to improve our lives and trade occurs only when both parties benefit from the transaction. Individuals and companies engage in trade; countries do not trade, as countries are just geographic areas with political boundaries.

The term “Trade Deficit” causes a lot of confusion and implies that one country is in debt to another country. This is not the case.

The “Trade Deficit (or Surplus)” used to be called “The Balance of Trade.” I do not know when or why the name was changed, but one possibility is that “trade deficit” sounds more ominous and gives the government a chance to address a problem that doesn’t exist. The following examples apply the typical definition of trade deficit.

Assume you are a programmer and work for a construction company. Your employer has a huge trade deficit with you; that is, your employer buys all of your work, but sells you little or nothing. You probably have a trade deficit with your grocer; you purchase from the grocer, but your grocer has no need for your programming skills and does not purchase anything from you.

Similarly, the people of Massachusetts have a trade deficit with the people of Florida when it comes to oranges and the people of Florida have a trade deficit with the people of Massachusetts when it comes to cranberries. We do not give a second thought to these trade deficits. Since all of the examples occurred within the U.S., the Bureau of Economic Analysis would not report a change in the U.S. trade deficit.

Let’s take it a step further.

A Honda dealer sells 50 cars and needs to replenish inventory. It orders 50 vehicles from Honda Japan (HJ) and wires $1 million dollars to pay for the vehicles. The Honda dealer has a trade deficit with HJ and the U.S. reports a trade deficit with Japan.

HJ has U.S. dollars that it needs to use. HJ can use those dollars to purchase components for cars. If it purchases components from a U.S. manufacturer, HJ has a trade deficit with the component manufacturer and the U.S. trade deficit with Japan goes down. If HJ purchases components from Korea or China using dollars, the U.S. trade deficit with Japan does not change, but now Korea and China have U.S. dollars that they need to use.

If HJ uses the $1 million to purchase land for a plant in Texas, the U.S. trade deficit with Japan does not change. This type of transaction is not included in the calculation of trade even though HJ purchased a U.S. “product.”

Government action to lower the trade deficit through tariffs or import quotas (e.g. sugar), hurt the consumer. In the 70s, Americans started buying Hondas, Datsuns/Nissans, and Toyotas. These cars were cheaper and more reliable than American vehicles. The Federal government could have imposed steep tariffs on these vehicles, but to what benefit? Purchasers of these vehicles would be worse off because, after tariffs, the exact same vehicle would cost more. The intended beneficiaries, U.S. automakers, were not meeting customer expectations and were losing market share. Tariffs would have forced some consumers to purchase a U.S. vehicle, but the tariffs would have prolonged the inefficiency of the U.S. manufacturers.

If foreign companies can produce an equivalent product for less money, consumers benefit. Foreign trade may result in some manufacturing jobs lost to foreign companies. However, jobs at companies that import and distribute products increase, offsetting the domestic manufacturing jobs lost from imports. Additionally, with lower prices on imported goods, consumers have funds available for other purchases, creating jobs in those industries.

At times, governments subsidize exports (think Ex/Im Bank). In essence, they are taxing their own citizens to the benefit of the export company and the foreign purchaser of the product. If China is subsidizing its exports, it is similar to giving a gift to the purchasers of those exports. Candidates proposing to impose steep tariffs on imports are hurting consumers in an attempt to help inefficient businesses. Trade is about individuals making the best choices for themselves. Free trade keeps the customer the king.

One reason the reported trade deficit keeps growing is that foreign entities use those dollars to bankroll the National Debt/Annual Deficit rather than purchasing goods and services. When the government runs a deficit, the government has three choices: increase taxes, print money, or borrow money. The first is out of the question. The second can be used for a short period, but eventually the taxpayer feels the pain of price inflation. The third is the easiest option, especially when there are eager lenders. Maybe reducing the size of the federal government and its need to borrow would lead to “balanced” trade.

Thomas Nichta lives in San Antonio, Texas.