In 1776, Adam Smith observed that nothing “can be more absurd than this whole doctrine of the balance of trade.” Sadly, almost 250 years later, the president – along with his economic adviser Peter Navarro and Commerce Secretary Wilbur Ross – has elevated this economic fallacy into a pretext for protectionism.
Fueling this bipartisan hysteria is the widespread failure to understand that United States trade deficits generally add capital to our economy – more factories, more R & D or more machines.
DBx: No concept in economics is responsible for more confusion and policy mischief than is the so-called “balance of trade.” The many fallacious beliefs about a trade deficit include the notion that –
– aggregate demand drains from each economy that runs a trade (or current-account) deficit, thus causing overall employment to fall in each country that runs a trade deficit;
– the GDP of a country that runs a trade deficit is lowered by that trade deficit;
– the denizens of a country that runs a trade deficit spend too much on consumption and save too little;
– a trade deficit is evidence of poor policy in any country that runs such a deficit;
– a country’s trade deficit would be ‘cured’ if only the people of that country were to save more or to buy fewer imports;
– a trade deficit in the home economy is evidence of ‘unfair’ trade practices by that country’s trading partners;
– a trade deficit means that each country that runs one is “losing,” and that to “win” at trade means running a trade surplus (or, at least, to not run a trade deficit);
– a trade deficit run by the home economy means that that economy’s trading partners who have trade surpluses are being enriched at the expense of the people in the home economy;
– a trade deficit necessarily makes the citizens of any country that runs one more indebted to foreigners;
– a trade deficit involves a net transfer of capital or asset ownership from citizens of each country that runs a trade deficit to citizens of countries that run trade surpluses;
– each dollar (or each yen, or each euro, or each peso, or each pound, or each you-name-the-currency) of a country’s trade deficit today means that the people of that country must sacrifice that much consumption sometime in the future;
– bilateral trade deficits have economic meaning and relevance;
– a trade deficit is something that should be “fixed” – that is, reduced or eliminated – through government policy, including especially through trade restrictions.
None of the above-listed beliefs about trade deficits is supportable. None. Not one. Not in the least. Each and every one of these beliefs is easily refuted with either basic economics or, in many cases, with simply a clarification of the definitions of terms and concepts used in national-income accounting. And yet these – and no doubt other – false beliefs about trade deficits (and about the so-called “balance-of-payments” generally) are widespread and spill daily from the mouths and keyboards of politicians, pundits, professors, and propagandists.
The belief that trade deficits cause economic problems in countries that run them – and that trade deficits necessarily reflect poor policies or profligacy by the people of those countries – is the economic equivalent of, say, the belief that the world is ruled by sorcerers who ride fire-breathing dragons and who marry their daughters off to centaurs. Both sets of beliefs are pure madness, yet one of them serves as the basis for real-world policies.
