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Oh That No One Would Ever Have Embarked Upon ‘Balance of Trade’ Accounting

In my latest column for AIER I continue to beat back against the madness of fretting over the so-called “balance of trade.” A slice:

Oftentimes, when pundits or politicians complain about the US trade deficit, they have in mind only trade in goods or merchandise – that is, only trade in tangible items such as soybeans, steel, tires, and textiles. Trade in services is ignored. Indeed, the US Census Bureau regularly reports on the “goods deficit” that America routinely runs each month in its trade with the rest of the world. Whenever, as is almost always the case, we Americans in some month import more goods than we export, this outcome is described as a “negative balance of trade in goods.” Negative. Sounds bad.

But it’s neither bad nor good. It’s meaningless.

Well over three-quarters of US GDP is services, everything from Jack the lawn-care guy mowing your lawn to Jill the neurosurgeon removing your neighbor’s brain tumor. For many decades now, most of us Americans have had comparative advantages at producing outputs classified as “services.” And because to have a comparative advantage is to have many comparative disadvantages, most of us Americans have long had a comparative disadvantage at producing goods. It’s thus no surprise that America is today the world’s largest exporter of services.

It should then also be no surprise that, while we Americans import more goods than we export, we export more services than we import. America regularly runs a so-called “positive balance of trade in services,” with many of these service exports paying for the goods that we import.

So what?

So this: Fretting about the “trade deficit in goods” run by Americans makes no more sense than fretting about the “trade deficit in goods” run by Taylor Swift. Ms. Swift, after all, is like most Americans: she specializes in producing and selling services, and uses some of this service-sector income to buy goods. And just as Ms. Swift would make herself immensely poorer were she to change her work habits in order for her to sell more goods than she buys, our government would make us Americans immensely poorer were it to arrange for us to export more goods than we import.

Because services have economic value no less than do goods, it’s ludicrous to isolate any one of these forms of valued outputs – namely, goods – and then to measure and report a country’s purchases and sales of that one form of output.

Such measuring and reporting is just as pointless as would be the measuring and reporting of exports and imports according to color. The US government could, for example, record the aggregate value of all the maize, pencils, lemons, and other yellow things that we export, and record also the aggregate value of all the sunflowers, honey, butter, and other yellow things that we import, then compare the value of our yellow exports to our yellow imports and issue every month a report on America’s balance of yellow-things trade. This exercise could be carried out for all of the other colors of exports and imports. America would be found to have a “negative trade balance” in some colors and a “positive trade balance” in other colors, but what would be the point of such an exercise (except, perhaps, to better arm American corn farmers to lobby for more subsidies)? Common sense correctly tells us that exports’ and imports’ colors are economically meaningless. It follows, obviously, that a report that America last month ran a “negative balance of trade in yellow things” would be no cause for concern (and no credible justification for more subsidies to corn farmers), just as a report that America last month ran a “positive balance of trade in blue things” would be no cause for celebration. Both reports would be economically meaningless.

The classification of outputs bought and sold on international markets according to whether these outputs are tangible or intangible is no more economically justified than would be the classification of these outputs according to their colors. Yet unlike the latter classification, the former classification is routinely performed and written about – and pontificated on – as if it’s laden with economic meaning. This fact alone is powerful evidence that officialdom’s understanding of international trade is seriously defective. Anyone who finds meaning in a “balance of trade in goods” is someone whose thinking about the economics of trade is so incompetent that anything he or she says about trade deserves no serious attention.

Matters improve only somewhat when what is meant by the so-called “trade deficit” is an excess of imports of goods and services over exports of goods and services. Measuring the combined values of goods and services traded internationally at least avoids the pitfall of supposing that the production and consumption of some kinds of economic outputs (for example, tangible things) is inherently better or worse than is the production and consumption of some other kinds of economic outputs (for example, intangible things). But even when the value of traded goods is combined with the value of traded services, any resulting finding of a “trade deficit” or “trade surplus” is highly misleading.

If this month we Americans import more goods and services than we export – that is, if we run a so-called “trade deficit” – one conclusion commonly drawn by people who are poorly informed about international commerce is that the difference between the value of what we export and the value of what we import must be “financed” either by foreigners extending credit to Americans or by Americans disgorging assets to foreigners. If this common conclusion were correct, then US trade deficits would indeed reduce the net worth of Americans as a group. With every month of trade deficits we Americans would either go further into debt to non-Americans or the value of the assets that we own would fall. Either way, our net worth would decline.

Fortunately, this common conclusion is spectacularly incorrect. America started in 1976 what will be at the end of 2023 an uninterrupted 48-year run of annual trade deficits. 1976 is the year that I graduated from high school, and 2023 is the year that I reach the traditional retirement age of 65. So for my entire, long adult life America has run trade deficits. If US trade deficits really do reduce Americans’ net worth, we would by now be a nation of paupers. Yet we aren’t. Not remotely.