Here’s a letter to a long-time, protectionist correspondent, Mr. Nolan McKinney:
Mr. McKinney:
You find “unbelievable” my claim that in a world of more than two countries there is no reason to expect any pair of countries to have ‘balanced’ trade with each other – and, hence, no reason to worry about America’s so-called ‘trade deficit’ with China. “Common sense,” you insist, “tells us the US’s trade deficit with China works to China’s advantage at Americans’ expense.”
I’m afraid that your common sense here misleads you.
Suppose that in June Americans bought $1 billion worth of steel from China, and the Chinese immediately turned around and spent every last cent of these export earnings buying $1 billion worth of lumber from America. In this case trade between America and China would be ‘balanced,’ so supposedly you’d be unconcerned.
Suppose that in July, Americans again buy $1 billion worth of steel from China, but the Chinese, rather than buy lumber from America as they did the previous month, instead immediately spend this $1 billion buying coffee from Brazil. The Brazilians then immediately spend this $1 billion buying lumber from America. In this case, you and protectionists such as Robert Lighthizer, Donald Trump, and Bernie Sanders would flail your arms and cry that America is running a trade deficit with China. You’d raise alarms about lost American jobs, weakened American ‘competitiveness,’ and ‘unfair’ Chinese trade practices. Yet this reaction would be silly.
While it’s true that in July the Chinese purchase less from Americans than Americans purchase from the Chinese – thus creating in July a so-called American ‘trade deficit’ with China – the economic consequences for Americans are the same in July as in June. In each of the two months, the $1 billion of American purchases of Chinese-made steel result in $1 billion additional purchases by foreigners of American-made lumber. And of course the same number of jobs that are supported in the U.S. lumber industry when American lumber mills export $1 billion of output to China are supported in the U.S. lumber industry when American lumber mills export $1 billion of output instead to Brazil.
I could elaborate further, but the above example suffices to reveal that, in a world of more than two countries, the failure of trade between any pair of countries to ‘balance’ is economically meaningless. Therefore, when anyone uses such a ‘failure’ as a reason to agitate for protectionist policies, I conclude – with great confidence – that that person is either economically ignorant or is intentionally misleading his or her audience.
Sincerely,
Don
