A thought experiment, dear reader, on how to think about international trade and its impact on a country’s wealth.
What if one day every country in the world suddenly said in unison: “Hey America! We’ve decided we think you’re the only one best and to show you how much we love you, we’ve decided that from now on we’ll send you 10% of everything we produce for free. And in return, you don’t have to send us anything at all! You can keep everything you produce for yourself. Moreover, you also benefit from everything we send you!” Suddenly, Americans are receiving cars, books, electronics, food, etc., all for free. If other countries decided to send us lots of valuable stuff for free, wouldn’t that be great? (Great for Americans anyway – not so great for the citizens of those countries.)
Now imagine the opposite scenario unfolding. Every country on earth decides to say, “Hey America! We think you absolutely are terrible and we have decided that from now on you must send us a tithe consisting of 10% of everything you produce, for which we will not send anything in return. We keep everything we produce for ourselves.” Now, many goods and services produced by Americans can no longer be consumed by Americans, nor do Americans consume goods or services produced elsewhere in the world. If we sent a lot of valuables to the rest of the world but got nothing in return, wouldn’t that be bad? (Bad for the Americans anyway – but pretty good for the citizens of those other countries.)
New scenario time. It’s the same as the first scenario, only instead of sending us free stuff, every country in the world decides to send all this stuff to America in exchange for 1% of the amount of stuff sent to us from us. Getting a lot of stuff in exchange for giving up very little stuff is not rather A sweet deal as getting a lot of stuff for free, but it’s still very good.
Last scenario – same as the second, but instead of forcing Americans to send 10% of what we produce in exchange for nothing, all the other countries in the world agree to send Americans 1% as much stuff as Americans send them. Sending away a lot of stuff and getting only a little in return isn’t as bad as sending a lot of stuff away and getting nothing at all – but it’s still a crappy arrangement.
But what if I told you that in the first and third scenarios above, America is actually a… trade deficit with the rest of the world, while America in the second and fourth scenarios has a trade surplus. Does that suddenly change which scenarios are good or bad? Obviously not. The trade deficit situations are still much better if you’re a US citizen, and the trade surplus situations are still pretty terrible. In the trade deficit scenarios, Americans can consume all (or almost all) of the goods and services they produce plus more on topwhile in the second scenario, Americans consume fewer goods and services than they produce, and lack a compensating benefit (or barely benefit) from goods or services produced elsewhere.
In international trade, imports are an advantage and exports are a cost item. Paul Krugman put it well when he said “Import, not export, is the purpose of trade. That is, what a country gains through trade is the ability to import what it wants. Export is not an end in itself: the need to export is a burden the country has to bear because its import suppliers are rude enough to demand payment.” A country with a trade deficit (or, in other words, a country with a trade deficit). investment surplus) is a country where citizens receive more goods and services from foreigners than citizens send away for foreigners to consume.
Those who argue that Americans would benefit if we just exported more goods and services and imported fewer would have to conclude that the second and fourth scenarios actually enrich Americans, while the first and third impoverish. Too many people think that a trade deficit is somehow comparable to a household running a budget deficit. If I consistently spend more than I earn, my household budget will be in deficit and if that goes on for too long, things will end very badly for me. People hear that “America has a trade deficit” and think that means America is some kind of household that spends more than it takes in, but that’s just a category error. Trade deficits and budget deficits describe things that are categorically different from each other. The idea that a country with a current account trade deficit is in any way analogous to household spending beyond their means, and the populist movements inspired by such muddled thinking, must be among the most damaging of all common economic myths belong. .