International trade is one of those topics of political economy that many people misunderstand. It’s like inflation, in that regard. The balance of trade, that is the value of exports less imports, is a commonly quoted and discussed national statistic.
A negative balance, or trade deficit, means that imports exceed exports. As a practical matter, the US has run a trade deficit since the end of the second World War. Australia ran trade deficits post war until the 21st century during which we have been running a trade surplus.
Is a trade deficit a bad thing? Is a trade surplus a good thing? No.
Many commentators worry about trade deficits. The worryers are probably more vociferous than the chilled out laissez-faire types who say, ‘don’t worry, be happy’. Maybe that is why we tend to hear more worrysome stories about trade deficits.
We should be clear that a trade deficit is neither a good thing nor a bad thing. Same for a trade surplus. It’s just a thing. Let me make the case.
To begin with, remember that a trade is a voluntary act of exchange between two parties, both of whom benefit from the transaction. If only one of the parties would benefit, the deal would not happen. Both parties are better off. Let that sink in for a moment.
The transactions will be in their millions, by consumers, households, businesses, governments. At the same time, those consumers etc will be trading with other domestic parties – the foreign trade component will be only one part of their overall trade. The individual trades can be totted up by the clerks in the Statistics Bureau.
When I was younger and finding my way in the actuarial world, I ‘exported’ my services to my employer. I ‘imported’ the goods and services that I needed to live – food, housing, energy etc. All my ‘export’ earnings were from domestic trade. I was in a trade surplus domestically, essential to pay off debts, increase savings etc. Most of my ‘imports’ were domestic, but on occasions, I would buy something from overseas. However, the Australian Bureau of Statistics would have my data counted, small as it was, in the balance of trade deficit column. In terms of national economic statistics, only certain types of trades are counted in the trade figures. Was I in a trade deficit overall? No, otherwise I would have gone bust. Was I in a trade deficit if only international trades were counted? Yes.
I used income from other sources (domestic) to pay for foreign goods. The same way that I used income from other sources to pay for domestic goods. When I was counted as a trade debtor, there were others counted as trade creditors. The balance of trade statistic is the aggregation of a limited subset of transactions, only those that cross borders. It will be different for different individuals.
The economic trade between willing voluntary actors is overwhelmingly responsible for productivity growth and the rise of wealth. It does not matter whether the trading parties are in the same household, street, city, state, country or hemisphere. The more trading opportunities the better. That I can use some of my domestic income to pay for foreign goods vs domestic goods is irrelevant, on the assumption that there is a financial system that allows currencies to be bought and sold on the open market.
All trade is beneficial by definition (both parties gain from it) and it does not matter whether it is foreign or domestic. That the national statistic, balance of trade, representing just one certain type of trade and ignoring all others, gets some people worked into a worry is unfortunate. And they never seem to ask the question: if a trade deficit is bad, why do countries running deficits seem to get on ok? If a trade surplus is good why do the countries running surpluses appear not that different from deficit countries?