Why Fear a Trade Deficit?

Column 2017-6  (2/27/17)

 With foreign trade now a front burner political issue we are
likely to hear more about that thing called a trade deficit.  Many people
claim a trade deficit is a bad thing.  How could anything named
"deficit" be good?

     Shakespeare asked, What's in a name?  Let's consider, What is
in the name "trade deficit?"  If a nation imports more than it exports it
is said to have a trade deficit  If your bank account imports more
money than it exports, Would you call the results a deficit?

     Things we import are useful to us.  Things we make and export
are a waste.  Someone else gets to use them.  If we could import all the
stuff we now make we could live the same way we do now.  If we
could get the imports without making anything to export, we would gain
a whole bunch of leisure time.

     If we imported nothing and exported everything we made,
everyone would soon starve.  It seems foolish to brand imports as bad
while praising exports.  It is like calling work good and the things work
produces bad.  Exports can have value to us only in one way.  We can
use the exports to pay others for stuff they make for us.  Without
payment the making is likely to stop.

     How can we import more than we export?  Does it mean we
aren't paying for all of our imports?  One economist pointed out that we
don't have a trade deficit, instead we have a transportation deficit.  A
simple example will explain why.

     Imagine Toyota shipping $100 million worth of vehicles to the
US and selling them.   Then Toyota buys $100 million worth of
assembly line equipment in the US.   Now consider two options.

     In the first option Toyota ships the equipment to Japan and
builds an assembly plant.  When the purchase is transported across the
magic line it cancels the $100 million trade deficit.  Without the
transportation the trade deficit would live on.

     In option two Toyota builds the assembly plant in the US.  As a
result the US increases its trade deficit by $100 million.  Which benefits
the US more, an assembly plant in the US or one in Japan?

     Such foreign investments in the US are the main cause of the US
trade deficit.  Foreign investors create the trade deficit because they find
the US a better place to invest than their own, or any other, country.

     Some Canadians seem proud that Canada usually has a trade
surplus with the US.  Why are they proud that their fellow Canadians
find investing in Canada inferior to investing in the US?

     The saving and investment rate for people in the US is very low. 
Without investment prosperity is impossible.  The US economy would
be in far worse shape than it is if foreigners hadn't made the
investments that created the US trade deficit.  We should say thank you
rather than complain about the trade deficit.

     There is another small contributor to the trade deficit.  Some
money we spend on imports never comes back to buy anything in the
US.  The local currency in some countries is so bad that people prefer
to use US dollars.

     We shouldn't feel badly about the loss of that money.  Taking
money out of circulation in the US increases the value of the money we
still have.  Without having to increase our spending, we get to buy the
things those foreigners didn't buy.  Again, we should just say thank you.

     The trade deficit isn't a debt.  It never has to be paid off.  If
foreign investors want to take their investments home, they are free to
do it.  No one has any obligation to pay them for their investments.

     President Trump wants increased foreign investment in the US. 
He also wants to reduce the trade deficit.  The one thing certain is he
has to fail to achieve one of those goals.

aldmccallum@gmail.com
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Copyright 2017
Albert D. McCallum