Defending the virtues of liberty, free markets, and civilization... plus some commentary on the passing scene.

Freedom's Fidelity

Thursday, April 15, 2004

Trade Deficits - Good, Bad, Indifferent?

Dan Drezner excerpts this Reuters report on trade and calls it good news:
U.S. exports leapt four percent -- the highest monthly increase since October 1996 -- to a record $92.4 billion, while imports rose 1.6 percent to a record $134.5 billion.

The politically sensitive trade gap with China fell nearly 28 percent in February as imports from that country slipped to $11.3 billion, the lowest level in nearly a year, and exports to China rose 17 percent to $3.0 billion.

The lower dollar appeared to help all categories of exports, as shipments of industrial supplies and materials and autos and auto parts both set records. Exports of consumer goods were only slightly below the record set in November and exports of capital goods, such as aircraft and industrial machines, were the highest since May 2001.

Exports of services, which include travel, also set a record.
Does this really matter though? I know it does politically, we often hear doom and gloom reports about growing trade deficits, but in terms of free trade economics and wealth creation does this really matter?

I have a major trade deficit with the grocery store in my neighborhood. I spend hundreds of dollars a month there and they buy nothing from me. I have a major trade surplus with the company I work for. They purchase labor from me every day, but I don't buy any of their services.

Yet, somehow the grocery store, the huge corporation I work for, and myself are all doing relatively well, despite the existence of massive trade surpluses and deficits between us. Would I be better off quitting my job and instead going to work for the grocery store in an attempt to narrow my trade deficit with them? Or should I start using my free time to grow my own food with the aim of becoming self-sufficient in that respect? Would the company I work for be more successful if it fired all workers that it had a serious trade deficit with? The answer to the above questions is an obvious "no."

In the case of China, we are buying more products from them than they are buying from us, but what are they doing with those American dollars if not using them to purchase American products or services at some point in the future? I'm not sure a trade deficit figure, in and of itself - with one specific country, has much of any explanatory power in terms of a nations economic well-being. Am I wrong?

UPDATE: I posted this question in Dan Drezner's comments section.

UPDATE II Welcome Carnival of the Capitalists readers, FYI - here's another, informal econ related post from this week. Thanks to C of C for another great edition.


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