A sizeable number of economists, especially libertarian ones, actually defend trade deficits as good things. They base their argument on one made by an influential French economist of the 1800s named Frédéric Bastiat, who essentially said that if a company or other entity sells its products overseas and then buys lots of other products in that foreign land — products that are sold more inexpensively there than they are sold in the home country — the company or entity is not causing its home country or people hardship. In fact, he says, the home country benefits because its people are merely getting a really good deal in trade. For example, say Apple sells its iPhones in China, banking the money in the United States. Then if Apple workers and stockholders use the money to buy all manner of cheap Chinese products — oranges, fish, lamps, lightbulbs, shoes, etc. — Americans should celebrate their cheap buys.
In correspondence with this writer, economics professor Walter E. Williams was gracious enough to supply a succinct rationale for the line of thinking behind the defense of trade deficits:
Briefly: Say that a Japanese producer sells us a Toyota for $20K. If he just kept the money, it would be great for us. We’d have Japanese producers producing wonderful thing[s] for us in return for tiny slips of paper called dollars. If you accept that Japanese producers are not so stupid as to do that, and they don’t buy anything from us, then what? They might use those dollars to purchase something from an India[n] producer. India[n] producers have no use for dollars except to use them to purchase something from maybe a German producer. The German producer might then purchase something from the U.S. The only reason anyone would take a dollar in return for goods is to ultimately have a claim on something produced in the U.S. That’s unless you believe that foreigners just love to keep and look at the pictures of our former presidents on tiny slips of paper.
So under this theory, all the dollars Americans send abroad in trade eventually return to the United States to buy goods or services from Americans, unless foreigners are foolish enough to keep those little colored pieces of paper instead of redeeming them for American products. Either way, Americans win.
The trade-deficits-aren’t-bad argument concludes that the economies of both countries involved in unequal trade benefit by the exchanges. In fact, under the theory, the country with the trade deficit probably is actually making out better in trade deals than the country or countries with which it trades: Not only did it get a very good deal in trade, but the country or countries trading with it will boost its economy by buying its products or stocks or bonds.
As has been said many times, “It sounds good in theory; how does it stand up to reality?”
Assumptions, Assumptions
Actually, there’s good reason to see things this way — because trade deficits are
not necessarily bad. As Professor Williams also has pointed out, very often what foreign entities do with the money Americans send them for products is buy stocks or bonds in the United States, strengthening segments of America, or they open businesses here, such as Toyota did in Huntsville, Alabama. As well, often trade deficits are accompanied by less unemployment, increased GDP, more manufacturing output, and lower poverty rates, as related by the Cato Institute’s Daniel Griswold in his article “A Rising Trade Deficit Signals Good Times for U.S. Economy.”
However, observation of the economies of the world shows that the theory doesn’t stand up well under all conditions. It is only true under certain conditions.
Consider: If it is absolutely true that trade deficits don’t matter, it must hold true, as well, that
any size trade deficit doesn’t matter — even to the point that a country can purchase all goods from abroad, without consequence. But there is a very obvious consequence to such a course, namely currency crashes — of which there have been 21 around the world in the past 25 years.
Of the 21 countries that caused hyperinflation of their currencies, 17 were running trade deficits at the time their currencies imploded. One of the remaining four, Brazil, had deficits leading up to the crash, but not in the year that rapid inflation began because of newly imposed import restrictions; and another, Zimbabwe, didn’t have trade deficits until several years after inflation began in earnest, but its foreign trade did drop dramatically before then, leading to hyperinflation. Of the two remaining countries, Poland and Russia, there were other factors involved that had a similar effect on their economies as trade deficits: Poland had a trade surplus with Russia, but Russia only actually paid for a small fraction of the goods it imported from Poland because Russia was becoming insolvent as well.
In Russia, before its currency imploded, imports and exports usually balanced because the Western world didn’t accept the ruble in trade — Russia needed to barter or use gold in trade with Westerners — but it still essentially ran deficits because in trade with the communist bloc, Russia often paid higher-than-world-market prices for goods it got from its trade partners in order to boost their failing economies. (For instance, Russia paid Cuba above-market prices for sugar.) Russia also gave direct aid to totalitarian governments so that they would follow Russia’s foreign-policy lead.
Is it merely coincidence that countries that have hyperinflated their currencies had trade deficits, or is it a pattern signifying a link?
A currency hyperinflates when producers in a country can’t produce enough goods — create enough wealth — to pay for government services, and the government decides to print money to pay for its employees and services. When people both at home and abroad realize that the currency produced by a country far outstrips the value of the saleable goods available in that country, price inflation runs rampant, and if enough money is printed, the currency can lose value rapidly, becoming virtually worthless. It is a truism that if a country purchased all goods from abroad, a country’s currency would quickly devalue, providing a tie between trade deficits and currency crashes. (In truth, a country could provide services in exchange for goods, meaning a country would have to run a deficit in both goods and services to rapidly ruin its currency.) And hyperinflation often leads to pain for the people in those countries: starvation, rampant crime (post-crash in Russia, when criminals wanted something such as an apartment, the original owners often simply disappeared), lack of healthcare, etc., so trade deficits can definitely have downsides.
Also, if it is strictly true that trade deficits are good things, it follows, too, that every country with a trade deficit should benefit. And that’s obviously not true. In fact, when Third World countries open their doors to imports, and the peoples in them are supplied with goods from abroad far cheaper than they could get the goods domestically, their local industries can be overwhelmed before they can compete in world markets, shutting them down. Hence, the open doors cause the countries to have few jobs, and the people continue to live in Third World conditions, often holding such livelihoods as growing gardens or herding cows and living in mud and stick huts.
Ironically, showing how open trade doors in Third World countries
doesn’t work is a case of generosity gone awry, as explained in the October 2011 article in
Foreign Policy magazine entitled “Haiti Doesn’t Need Your Old T-shirt.” When Americans give their old clothes to a charity such as World Vision, the charity then gives the clothes away in Third World nations, putting the local industries out of business. Then the out-of-work residents can no longer afford to buy food or other necessities. The author explains:
World Vision, for example, spends 58 cents per shirt on shipping, warehousing, and distributing them, according to data reported by the blog
Aid Watch — well within the range of what a secondhand shirt costs in a developing country. Bringing in shirts from outside also hurts the local economy: Garth Frazer of the University of Toronto estimates that increased used-clothing imports accounted for about half of the decline in apparel industry employment in Africa between 1981 and 2000. Want to really help a Zambian? Give him a shirt made in Zambia.
The article makes clear that people seldom starve or are malnourished in Third World countries because of a lack of available food; they go hungry because they cannot afford to buy the food.
Almost counter-intuitively, gifts of food also further impoverish the poor. When President Bill Clinton sent subsidized rice to Haiti, his actions wiped out thousands of local rice farmers who could no longer sell their produce (an action Clinton is said to have deemed one of his most grievous mistakes).
On the other hand, if a country has a trade deficit because it is buying production equipment so that it can soon produce items and run trade surpluses, a trade deficit could actually be a good thing. Take Malaysia as an example: In 1995, it had a worrisome trade deficit equal to nine percent of its gross national product, mainly as a result of importing capital goods for start-up enterprises. Since 1998, it has recorded consistent trade surpluses.
More at:
https://www.thenewamerican.com/econo...icits-are-good
If you don't make anything you will run out of money to buy what others make and be unable to supply your own needs.
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