The Trade Deficit: Much Ado About Nothing

I have a dirty little secret that I want to share with my readers. It’s about a nagging problem I have had for a long time. It just never seems to go away. Heretofore, I have not wanted to admit to this problem in public because the newspaper headlines remind me monthly that this sort of thing is bad and it’s embarrassing. But I’m going to come clean, hoping that maybe someone out there can help me.

My problem is this: I have a trade deficit with my local grocery store called “Publix”. That’s right. Month after month, I buy more from Publix than Publix buys from me.

In fact, Publix has never yet bought anything at all from me. It’s been a one-way street right from the day I first shopped there. And I don’t expect that this is going to change any time soon because Publix shows no interest in buying my chief export, which is articles like this one. It just doesn’t seem fair.

I’ve actually considered several options. Each one would probably reduce or eliminate my trade deficit with Publix, but some wise guy always points out new problems each of these scenarios might create:

1. I could get Congress to force the company to buy enough of my articles to offset what I spend in its stores. But the more Publix buys from me, the less it will be able to buy from others, which will only increase their trade deficits.

2. I could get Congress to force Publix to cut its prices so that I won’t have to spend as much to get what I want from them. I thought that might at least reduce my deficit, but at lower prices I might actually be tempted to buy more. Or Publix might come under fire from the anti-trust people for dumping their goods below cost.

3. I could simply quit buying from Publix. That would really teach them a lesson. But I like what I’ve been buying from them! If I boycott them, wouldn’t that be like cutting off my nose to spite my face?

Of course, I don’t really mean any of this. As a free market economist, I know that there’s a fourth option here and it’s the only one that makes any sense: I should ignore this “problem” and never pay any attention again to whatever the trade situation is between Publix and me, except to pay my bills on time. America as a whole should do essentially the same thing. We should fire the people in Washington, D.C. who compile the numbers and the problem will go away.

Every month, the U. S. Commerce Department releases the official “balance of trade” figures showing the difference between the value of merchandise that enters the country and the value of merchandise that leaves the country. If imports exceed exports, America has a trade deficit, which sets off alarm bells in Washington. If exports are greater than imports, we’re all supposed to celebrate because that’s a trade surplus.

By this logic, draining the country of all goods and accepting none from abroad would be the best possible trade news. We wouldn’t be able to celebrate, however, because we’d all starve. But at least the government’s books would register one huge trade surplus!

This trade deficit nonsense is a throwback to the less enlightened times of 16th century mercantilists. They argued that a nation must never buy from foreigners more than it sells to them because that would produce an “unfavorable balance of trade” that would have to be settled by an outflow of gold or silver. The mercantilists wrongly assumed that gold and silver were the real wealth of a nation, not goods and services. They were also wrong to render value judgments about other people’s trading activities. The fact is that there can be nothing “unfavorable” about voluntary trade from the point of view of the individuals actually doing the trading, otherwise those individuals would not have engaged in trade in the first place.

The principle that both sides benefit from trade is readily visible when trade involves two parties within a country; it somehow becomes confused when an invisible political barrier separates the two. Neither the mercantilists of yesteryear nor those who fuss about the trade deficit today have ever satisfactorily answered this fundamental question: Since each and every trade is “favorable” to the individual traders, how is it possible that these transactions can be totaled up to produce something “unfavorable”?

To return to my opening analogy, I benefit when I buy from Publix or I wouldn’t keep doing it. The folks at Publix benefit as well because they would rather have my money than the stuff they sell me. We’re both better off because we have a trade relationship, which is why neither party ever complains about it. This would be no less true if Publix happened to be a company from Japan or Uganda.

Ultimately, the dollars that go abroad to pay for foreign imports will come back to buy American exports. But even if they didn’t — in other words, even if goods come here and dollars go there to simply stuff foreign mattresses — Americans with their supposedly harmful trade deficit would have the better end of the deal. We would get goods like Blu-Ray players and automobiles, and foreigners would be stuck with slips of paper decorated by pictures of dead American politicians.

Forget the trade deficit. We should occupy ourselves with more important things, like the next big bargain sale at Publix.