I find this is an economic myth that stays with us. Even many libertarians fall into the same trap, or simply don’t understand the subject.
Anyone who talks about the dangers of a trade deficit better be really clear on what they are talking about. At least 95% of people (probably higher) who complain about the trade deficit really don’t understand what they are talking about, at least on this subject.
A trade deficit is defined as when a country (or region) has imports that exceed exports. In the case of the United States, there is usually a trade deficit.
To be clear, some of the reasons for a trade deficit may not be good. But the trade deficit itself isn’t the problem here, but just a symptom.
For example, government deficits can contribute to a higher trade deficit. In the case of the U.S., where a lot of U.S. debt is bought by foreigners – particularly the central banks of China and Japan – the trade deficit is higher as a result. There are various reasons for this, which includes the dollar still being the world’s reserve currency, along with the fact that the central planners in China and Japan are a bunch of mercantilists.
But the answer to this problem isn’t to narrow the trade deficit. The answer is for the government to stop spending so much money and running up the debt.
If you take government debt out of the equation, all of a sudden things don’t look bad at all. In fact, a trade deficit can be a sign of prosperity, or an advanced civilization.
Instead of thinking about countries, think about cities. New York City has to have one of the biggest trade deficits in the world. How much agriculture or manufacturing of products happens in Manhattan? I won’t say its zero, but it is pretty close. Should New York City residents try to lower their trade deficit by focusing on manufacturing or farming instead of finance and banking?
The same people who say we need a lower trade deficit (without blaming the government’s deficits as the main problem) usually will also say we need more manufacturing. Again, apply the example of New York City.
There is nothing magical about manufacturing jobs. Actually, the U.S. is still huge in manufacturing goods, but it just takes fewer people to do it. This is a sign of an advanced civilization and a high division of labor. It is a sign of increased productivity.
If you go back over 100 years ago, the majority of people had to grow their own food. Now only a tiny percentage of people consider themselves to be farmers. This frees up our time to do other things, meaning we are able to provide other goods and services, including many luxuries.
There is nothing wrong with having what is considered to be a service economy. Again, it is a sign of our prosperity, at least as compared to a long time ago.
There is also the issue of comparative advantage. There are many goods that could be produced in the United States, but which are not. They are produced by foreigners and imported by Americans. It doesn’t mean that they are better at producing these goods (or perhaps they are). It just means that our time is better spent producing other things, while their time is better spent what they are doing.
The CEO of McDonald’s could be the greatest cashier and hamburger flipper in the company. But he isn’t going to flip hamburgers and collect money at the cash register, even though he is the best at it. His talents are better spent in another function. It is an issue of comparative advantage.
The only way all of this can be sorted out is by the voluntary marketplace where there is open and free trade, and buyers and sellers decide what they want to buy and what they want to sell. This includes the buying and selling of labor.
In a free and open market without government debt, there is no need to worry about any trade deficit because there really is no deficit. It is parties exchanging goods and services. If one party buys a good (imports) and the other party sells the good (exports), why should we think the buyer is worse off because of a supposed trade deficit? It is a voluntary exchange.
If anyone at all should be worried about a trade deficit, perhaps it should be the Japanese and Chinese who are collecting trillions of dollars of depreciating currency.