The following article was originally published in
December of 1998 in The Freeman. But the ideas expressed herein are so
applicable to the current frenzy over America’s record trade deficit, we thought
our readers would do well to focus on it again.
I have a dirty little secret that I want to share with readers of The Freeman. 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 J.C. Penney. That’s right. Month after month, I buy more
from J.C. Penney than J.C. Penney buys from me.
In fact, J.C. Penney has
never yet bought anything at all from me. It’s been a one-way street right from
the day I got my credit card in the mail. And I don’t expect that this is going
to change any time soon because J.C. Penney shows no interest in buying my
chief export, which is columns 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 J.C. Penney, but some wise guy always points out new problems each of
these scenarios might create:
I could get Congress to force the company to buy enough of my columns to
offset what I spend in its stores. But the more J.C. Penney buys from me, the
less it will be able to buy from others, which will only increase their
I could get Congress to force J.C. Penney 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 J.C. Penney might come under fire from the anti-trust people for
dumping their goods below cost.
I could simply quit buying from J.C. Penney. That would really teach
them a lesson. But then, doggone it, 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
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 J.C. Penney 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 heck of a
This trade deficit
silliness 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 J.C. Penney or I wouldn’t keep doing it.
The folks at J.C. Penney 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 J.C. Penney happened to be a company from Japan or
America’s trade deficit
with the rest of the world made headlines regularly in 1998 because it broke at
least one quarterly record. The Asian depression was one reason. Plagued by
weak economies, Asians purchased fewer American goods. The fall in the value of
many Asian currencies made goods from places like Japan and Indonesia cheaper in
the United States, where a relatively strong economy had already boosted
American demand for foreign goods. No one who actually engaged in the
transactions that produced the trade flows between the United States and Asian
countries did so because they wanted to hurt themselves, yet the trade deficit
alarmists say that those traders somehow hurt the United States.
Ultimately, the dollars
that went 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 VCRs 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 sale at J.
Note: Lawrence Reed is president of the Mackinac Center for Public Policy, a
research and educational institute headquartered in Midland, Mich.