Trade Deficits: A Response to Dennis Sevakis

Dennis Sevakis' article today on the supposedly dire consequences of the nation's "trade deficit," while obviously well-intentioned, misses the mark in several respects.

First, the article is based on the common misconception that a "trade deficit" represents a "transfer of wealth to persons and sovereign entities outside the United States."  This is not correct. 

Consider the balance of trade on goods, which represents the vast majority of the U.S. trade deficit.  The data provided by Mr. Sevakis show that in 2006, this figure was negative $838 billion.  This means that in 2006, Americans purchased $838 billion more in goods from foreigners than foreigners purchased in goods from Americans.  It cannot be said, however, that these purchases resulted in a "transfer of wealth" to foreigners.

For example, if an American consumer buys wine from an Italian vineyard, there is an exchange of wealth, not a transfer of wealth - i.e., the American exchanges his wealth in the form of currency to the Italian vineyard, which provides bottles of the desired wine in return.  Assuming this is a voluntary exchange, the value of the wine to the American consumer is equal to (or greater than) the value of the currency he gives up for it; otherwise, he would not make the purchase.  That is to say, the "wealth" he receives in the form of the wine is equal to (or greater than) the "wealth" he gives up in the form of currency.  In no meaningful sense, therefore, can it be said that the American consumer is made poorer by this trade, which is what a "transfer of wealth" implies.  Indeed, he actually is richer because his life has been enhanced by the enjoyment of the desired Italian wine.  The exact same analysis applies to the purchase of foreign automobiles or clothes or trinkets or whatever.

Conversely, the data provided by Mr. Sevakis show that in 2006, the balance on trade in services was positive $79 billion.  This means that in 2006, foreigners purchased $79 billion more in services from Americans than Americans purchased in services from foreigners.  Again, assuming these were voluntary transactions, the foreigners were not made poorer as a result of these trades.  They received "wealth" in the form of valuable services, which they paid for by exchanging "wealth" in the form of currency.  As with trade in goods, these are mutually beneficial exchanges. 

If the economic theory underlying Mr. Sevakis' analysis were correct, then no voluntary trades ever would take place because one party inevitably would be "transferring wealth" to the other party, and thereby being made poorer as a result of the exchanges.  Clearly, this is not how either the national or international economy actually operates.  (The only true transfer of wealth reflected in the current account data provided by Mr. Sevakis is the entry for "unilateral transfers," which represent sums of money sent out of the country, perhaps by an immigrant to a relative in his home country, with nothing received in return.)  Furthermore, implicit in Mr. Sevakis' argument is the notion that an American would be better off holding an amount of foreign currency (as in the trade-in-services scenario) than holding an amount of foreign goods (as in the trade-in-goods scenario).  I am not aware of any theoretical or empirical reason why this necessarily would be the case.  Why would a person be better off having Euros in his bank account than a Mercedes in his driveway?  Or vice-versa.  It all depends on his preferences.

At bottom, Mr. Sevakis appears to subscribe to a crude mercantilist viewpoint that nations get rich by hoarding gold (or in today's terms, "hard currency").  But gold or currency is only as valuable as the goods and services it can purchase in the marketplace - which today, due to advances in transportation and communications and banking, is international in scope.  This is the true measure of a person's or a nation's wealth.  After all, a man stranded on a desert island with a treasure chest full of gold ducats hardly can be described as rich.  Similarly, the average person living in the United States in 2008 is much wealthier than even a rich person living here was in 1708 or 1808 or 1908.  Why?  Because the amount and quality and variety of goods and services available today vastly exceeds what was available in the past.

Which brings me to the second major flaw in Mr. Sevakis' argument.  He apparently is of the view that the United States is in economic decline.  For example, he argues - with no supporting data whatsoever - that the U.S. is "diminish[ing] in importance on the world economic stage."  What does this mean?  The United States possess the world's largest economy, by far.  It is growing faster than the economies of most other advanced, first-world countries.  No other country exercises as much influence over the economies, and cultures, of other nations.   

This is not to deny, of course, that China and Japan and the European Union and OPEC, etc., exercise important economic influences of their own.  Surely they do.  Is this what so concerns Mr. Sevakis?  Is it not enough that we're number one?  Do we also need to be number one by such a large margin as to render the rest of the world's economies unimportant?  This seems to be the tenor of his argument.  If so, his concern is both unrealistic and self-defeating.  Other nations possess valuable resources of their own (some more than others, obviously), and will use those resources to become richer over time, just as the United States has in the past and will continue to do so in the future (provided we maintain and strengthen our commitment to private property and free enterprise).  Why should we engage in such paroxysms of pessimism simply because our international "neighbors" finally are enjoying some of the goods and services that modernity makes possible?  To view the world in this fashion is to consign ourselves to constant worry and complaining, with absolutely no benefit to ourselves or our economy.     

Certainly, the increasing wealth and sophistication of China, in particular, raises a host of potential political-military challenges.  Why?  Quite simply, because China is a hostile communist country.  But this has nothing to do with the "trade deficit" per se.  The Chinese cannot threaten us merely because we buy their textiles, or because they buy some buildings in our country.  On the other hand, I agree it is a mistake to sell them advanced technology (for example, the sale of ballistic missile technology under the Clinton Administration).  Yet to make that particular point requires data and arguments that are not found in Mr. Sevakis' article.  More importantly, China clearly is a special case, just as the Soviet Union was in the past half century.  Even if one agrees that free trade with China may present a strategic danger, this does not mean that free trade with Japan or the European Union is also dangerous.

I addressed similar concerns about free trade in a previous article

Lastly, I think Mr. Savakis misses the most valid criticisms of international free trade:  That it benefits higher-income consumers at the expense of middle- and working-class Americans who are employed in the industries that are undercut by cheaper foreign goods (similar to the way in which massive immigration undercuts the wages of certain domestic employees), and that it may lead to an excessive reliance on foreign producers that could undermine our ability to defend our country in time of war.  While I generally agree with the principle of free trade, I share these misgivings.  Yet such legitimate concerns require much more evidence and analysis to show how they outweigh the proven benefits of free trade.

So should there be some restrictions on the ability of American businesses and consumers to trade with other nations?  Yes.  We debate the details on a case-by-case basis. 

But should we be worried about the "trade deficit"?  No.

Steven M. Warshawsky  smwarshawsky@hotmail.com             

Dennis Sevakis' article today on the supposedly dire consequences of the nation's "trade deficit," while obviously well-intentioned, misses the mark in several respects.

First, the article is based on the common misconception that a "trade deficit" represents a "transfer of wealth to persons and sovereign entities outside the United States."  This is not correct. 

Consider the balance of trade on goods, which represents the vast majority of the U.S. trade deficit.  The data provided by Mr. Sevakis show that in 2006, this figure was negative $838 billion.  This means that in 2006, Americans purchased $838 billion more in goods from foreigners than foreigners purchased in goods from Americans.  It cannot be said, however, that these purchases resulted in a "transfer of wealth" to foreigners.

For example, if an American consumer buys wine from an Italian vineyard, there is an exchange of wealth, not a transfer of wealth - i.e., the American exchanges his wealth in the form of currency to the Italian vineyard, which provides bottles of the desired wine in return.  Assuming this is a voluntary exchange, the value of the wine to the American consumer is equal to (or greater than) the value of the currency he gives up for it; otherwise, he would not make the purchase.  That is to say, the "wealth" he receives in the form of the wine is equal to (or greater than) the "wealth" he gives up in the form of currency.  In no meaningful sense, therefore, can it be said that the American consumer is made poorer by this trade, which is what a "transfer of wealth" implies.  Indeed, he actually is richer because his life has been enhanced by the enjoyment of the desired Italian wine.  The exact same analysis applies to the purchase of foreign automobiles or clothes or trinkets or whatever.

Conversely, the data provided by Mr. Sevakis show that in 2006, the balance on trade in services was positive $79 billion.  This means that in 2006, foreigners purchased $79 billion more in services from Americans than Americans purchased in services from foreigners.  Again, assuming these were voluntary transactions, the foreigners were not made poorer as a result of these trades.  They received "wealth" in the form of valuable services, which they paid for by exchanging "wealth" in the form of currency.  As with trade in goods, these are mutually beneficial exchanges. 

If the economic theory underlying Mr. Sevakis' analysis were correct, then no voluntary trades ever would take place because one party inevitably would be "transferring wealth" to the other party, and thereby being made poorer as a result of the exchanges.  Clearly, this is not how either the national or international economy actually operates.  (The only true transfer of wealth reflected in the current account data provided by Mr. Sevakis is the entry for "unilateral transfers," which represent sums of money sent out of the country, perhaps by an immigrant to a relative in his home country, with nothing received in return.)  Furthermore, implicit in Mr. Sevakis' argument is the notion that an American would be better off holding an amount of foreign currency (as in the trade-in-services scenario) than holding an amount of foreign goods (as in the trade-in-goods scenario).  I am not aware of any theoretical or empirical reason why this necessarily would be the case.  Why would a person be better off having Euros in his bank account than a Mercedes in his driveway?  Or vice-versa.  It all depends on his preferences.

At bottom, Mr. Sevakis appears to subscribe to a crude mercantilist viewpoint that nations get rich by hoarding gold (or in today's terms, "hard currency").  But gold or currency is only as valuable as the goods and services it can purchase in the marketplace - which today, due to advances in transportation and communications and banking, is international in scope.  This is the true measure of a person's or a nation's wealth.  After all, a man stranded on a desert island with a treasure chest full of gold ducats hardly can be described as rich.  Similarly, the average person living in the United States in 2008 is much wealthier than even a rich person living here was in 1708 or 1808 or 1908.  Why?  Because the amount and quality and variety of goods and services available today vastly exceeds what was available in the past.

Which brings me to the second major flaw in Mr. Sevakis' argument.  He apparently is of the view that the United States is in economic decline.  For example, he argues - with no supporting data whatsoever - that the U.S. is "diminish[ing] in importance on the world economic stage."  What does this mean?  The United States possess the world's largest economy, by far.  It is growing faster than the economies of most other advanced, first-world countries.  No other country exercises as much influence over the economies, and cultures, of other nations.   

This is not to deny, of course, that China and Japan and the European Union and OPEC, etc., exercise important economic influences of their own.  Surely they do.  Is this what so concerns Mr. Sevakis?  Is it not enough that we're number one?  Do we also need to be number one by such a large margin as to render the rest of the world's economies unimportant?  This seems to be the tenor of his argument.  If so, his concern is both unrealistic and self-defeating.  Other nations possess valuable resources of their own (some more than others, obviously), and will use those resources to become richer over time, just as the United States has in the past and will continue to do so in the future (provided we maintain and strengthen our commitment to private property and free enterprise).  Why should we engage in such paroxysms of pessimism simply because our international "neighbors" finally are enjoying some of the goods and services that modernity makes possible?  To view the world in this fashion is to consign ourselves to constant worry and complaining, with absolutely no benefit to ourselves or our economy.     

Certainly, the increasing wealth and sophistication of China, in particular, raises a host of potential political-military challenges.  Why?  Quite simply, because China is a hostile communist country.  But this has nothing to do with the "trade deficit" per se.  The Chinese cannot threaten us merely because we buy their textiles, or because they buy some buildings in our country.  On the other hand, I agree it is a mistake to sell them advanced technology (for example, the sale of ballistic missile technology under the Clinton Administration).  Yet to make that particular point requires data and arguments that are not found in Mr. Sevakis' article.  More importantly, China clearly is a special case, just as the Soviet Union was in the past half century.  Even if one agrees that free trade with China may present a strategic danger, this does not mean that free trade with Japan or the European Union is also dangerous.

I addressed similar concerns about free trade in a previous article

Lastly, I think Mr. Savakis misses the most valid criticisms of international free trade:  That it benefits higher-income consumers at the expense of middle- and working-class Americans who are employed in the industries that are undercut by cheaper foreign goods (similar to the way in which massive immigration undercuts the wages of certain domestic employees), and that it may lead to an excessive reliance on foreign producers that could undermine our ability to defend our country in time of war.  While I generally agree with the principle of free trade, I share these misgivings.  Yet such legitimate concerns require much more evidence and analysis to show how they outweigh the proven benefits of free trade.

So should there be some restrictions on the ability of American businesses and consumers to trade with other nations?  Yes.  We debate the details on a case-by-case basis. 

But should we be worried about the "trade deficit"?  No.

Steven M. Warshawsky  smwarshawsky@hotmail.com