Here’s a letter to a new correspondent.
Mr. E__:
After reading this post, you think me “kind of silly and shallow for comparing trade deficits to witches given witches are figments of imagination but trade deficits are actual, objective things.”
There is indeed an actual accounting artifact called “trade deficit,” but it’s a highly subjective product of human imagination. It is a human choice, for example, to mark monetary payments for imports with a negative sign, and to mark monetary receipts for exports with a positive sign. The choice could easily have been the opposite, marking payments for imports with a positive sign (to record the value of what we obtain from trade with foreigners), and marking receipts for exports with a negative sign (to record the value of what we transfer through trade to foreigners). This lone change in an accounting convention would, without any change whatsoever in real economic activity, show that the U.S. is today on track to run its 50th consecutive year of annual trade surpluses.
Even if we keep the signage unchanged, it’s a human choice – to take another example – to count as a U.S. export a foreigner renting as a residence a condo in Houston, but not to count as a U.S. export a foreigner buying as a residence a condo in Houston. Were such real-estate purchases counted, like real-estate rentals, as U.S. exports (rather than as foreign purchases of U.S. capital), U.S. trade deficits would be smaller.
U.S. trade deficits would also fall if we were to count as U.S. exports the U.S. dollars that foreigners obtain to conduct international commerce.
My point here isn’t to recommend these or any other changes in these accounting conventions. My point, instead, is to point out that U.S. trade deficits are not nearly as objective as you and most people suppose them to be. Indeed, they are so economically nebulous – and, hence, misleading – that the world would be a much better place had no one ever thought to invent this accounting convention that Adam Smith rightly dismissed as “absurd.”
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
