Yet More Deficient Analysis

by Don Boudreaux on November 14, 2017

in Balance of Payments, Myths and Fallacies, Trade

Here’s a letter to the Weekly Standard:

Irwin Stelzer’s November 13th essay “There Is Nothing ‘Free’ About Our Trade With China” is chockablock with faulty analysis.  His most egregious error is to imply that something is amiss because the U.S. has with China (quoting Mr. Stelzer) a “$347 billion-and-growing goods trade deficit.”

First, a deficit in the trade of goods is completely insignificant.  Only 20 percent of U.S. private-sector output is goods (as distinct from services) while nearly 50 percent of China’s output is goods.  Therefore, to insinuate that the Chinese are playing some nefarious game by selling to Americans more goods than Americans sell to the Chinese makes no more sense than to insinuate that, say, tailors are playing some nefarious game by selling more goods to cardiologists than cardiologists sell to tailors.

Second, also completely insignificant is any bilateral trade (or current-account) deficit, such as America’s deficit with China.  Nothing in economic theory or logic suggests that economic entity A should sell to economic entity B the same amount that economic entity B sells to economic entity A.  Do you sell to your grocer the same amount that your grocer sells to you?  Do you buy an amount of goods or services from your employer equal in value to the labor services that your employer buys from you?  Of course not.  Such ‘balanced’ economic outcomes would, to say the least, be bizarre.  For the same reason, there is simply no reason to expect that in this world of ours of 195 countries that any pair of them will have ‘balanced’ trade with each other.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030


It’s understandable for a non-economist to suffer from the confusion that Stelzer suffers from here.  But Stelzer is an economist.  He should know better.


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