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Ignore the Politicians: Trade Deficits Don’t Really Matter

KenH

Well-Known Member
"In The Wealth of Nations, the great economist Adam Smith wrote, “If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them …. In every country it always is and must be the interest of the great body of the people to buy whatever they want of those who sell it cheapest. The proposition is so very manifest that it seems ridiculous to take any pains to prove it; nor could it ever have been called in question had not the interested sophistry of merchants and manufacturers confounded the common sense of mankind. Their interest is, in this respect, directly opposite to that of the great body of the people.”
...
Trade deficits or surpluses will always occur and will vary by product and from country to country. Keep in mind, you may buy lots of things from Amazon or Whole Foods yet they never buy anything from you. That’s a huge trade deficit on your end. But it does not matter because both parties benefited. The same economic relationship exists on the international level."

- rest of article at https://www.cato.org/blog/ignore-politicians-trade-deficits-dont-really-matter
 

Charlie24

Active Member
"In The Wealth of Nations, the great economist Adam Smith wrote, “If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them …. In every country it always is and must be the interest of the great body of the people to buy whatever they want of those who sell it cheapest. The proposition is so very manifest that it seems ridiculous to take any pains to prove it; nor could it ever have been called in question had not the interested sophistry of merchants and manufacturers confounded the common sense of mankind. Their interest is, in this respect, directly opposite to that of the great body of the people.”
...
Trade deficits or surpluses will always occur and will vary by product and from country to country. Keep in mind, you may buy lots of things from Amazon or Whole Foods yet they never buy anything from you. That’s a huge trade deficit on your end. But it does not matter because both parties benefited. The same economic relationship exists on the international level."

- rest of article at https://www.cato.org/blog/ignore-politicians-trade-deficits-dont-really-matter

We have a $300B trade deficit with China alone and that doesn't matter?
 

KenH

Well-Known Member
Note: In the context of this video, liberal is the older definition of the word, as in "classical liberal/libertarian", not in the new definition, as in "progressive".

12 minute video.

 

DaveXR650

Well-Known Member
At the 38 second mark Friedman says that Europe and Japan both do have protectionist tariffs against us. Yet he never mentions why they have not already experienced this disaster on their own countries that they themselves say will befall us.

At 1:50 he asks what other countries are going to do with all these dollars they accumulate with their favorable trade deficit. Here's where he leaves out a lot of information. For one, he says they can't just "sit on them". No, they buy our short and long term debt and we continue to pay more and more to them in interest payments. Also, when they do "invest" back in the US they do this in financial centers on the East and West coast and selected urban financial centers. They also use these dollars to build means of production so that they can have better goods to trade and with a standard of living much lower, combined with a government that can at will hold wages down and divert money to serious manufacturing means of production they can make it impossible for US workers to compete and thus the bottom long term effect is a moving of manufacturing from the US to those other countries along with a shifting of US wealth from fly over country to the financial centers where guys like Milton Friedman hang out.

Real wealth comes from mining something valuable, growing produce or livestock, and manufacturing and making things. Everything else amounts to "doing each others laundry". Those of us who are in service industries, medicine, education, or finance can be hugely successful, but it depends on a base of wealth from the basic things I mentioned. If you don't believe me then ask what a surgeon makes in Bangladesh or ask why global financial companies aren't clamoring to move to Tanzania.
 

KenH

Well-Known Member
From the article linked in the OP:

' If you believe in private property and that individuals should be allowed to buy and sell whatever they want—at local shops, among states, online, and from foreign businesses (Honda cars, anyone?)—then you know that all trade is good. It benefits the parties involved and brings people closer together.

You also realize that complaints about trade deficits, imbalances, and protection from foreign goods are nothing more than the “sophistry of merchants and manufacturers” and politicians who seek to confound “common sense,” whose “interest is opposite to that of the great body of the people”—the American consumers. '
 

KenH

Well-Known Member
My summary of the situation with the Trump Tariffs of 2025:

The McKinley Tariffs of 1890 were an economic disaster.

The Smoot-Hawley Tariffs of 1930 were an economic disaster.

The American people have already “been there, done that, and bought the t-shirt” twice. Looks like they might be buying that t-shirt a third time.
 

atpollard

Well-Known Member
Let's apply the OP on a HOUSEHOLD level as a "smell-test" for reasonableness.

My HOUSEHOLD buys $100,000 worth of goods from OTHER PLACES. We could make those same things for ourselves for $200,000 so this is far and away better for us to buy goods than make everything ourselves. Unfortunately, OTHER PLACES only buy $75,000 worth of services from my HOUSEHOLD. Thus my HOUSEHOLD has a $25,000 per year TRADE DEFICIT. After three years, my HOUSEHOLD owes $75,000, which is equal to our total annual revenue. After four years, my HOUSEHOLD owes $100,000 which is the total value of all goods we purchase. After 10 years, my HOUSEHOLD owes $250,000 which is is more than 3 years total HOUSEHOLD revenue. OTHER PLACES are reluctant to extend additional CREDIT and, faced with the possibility of starvation (my HOUSEHOLD can no longer purchase vital supplies), we default on the debt that we have no possibility of repaying and declare bankruptcy.

Based on the HOUSEHOLD comparison, I conclude that infinite Trade Deficits DO MATTER and the premise is false. You cannot drain an economy forever without consequence.
 

KenH

Well-Known Member
"The tariffs imposed by President Donald Trump in April 2025 have elevated the United States’ average effective tariff rate to approximately 22 percent...This escalation exceeds the tariff rates established under the Smoot-Hawley Tariff Act of 1930, which previously set average duties at around 20 percent.
...
Numerous old saws were vindicated this week. Foremost among them is the apocryphal claim that of the few things which are both true and nontrivial in economics, the Law of Comparative Advantage is one of them, and one that the people who should know it often do not. Furthermore, while knowledge in most sciences is cumulative, in economics and perhaps finance, it remains cyclical — rediscovered and then discarded only to resurface again when the same errors are repeated. We face another stark reminder that economic policy crafted in defiance of established principles may provide temporary relief or political appeal, but it ultimately invites far greater disruption and instability. Americans are justified in questioning exactly what they are being liberated from — and with growing unease, wondering what they may find themselves freed from next."

- rest of article at The Tariff Crash of 2025: The Price of Economic Amnesia | The Daily Economy
 

DaveXR650

Well-Known Member
My HOUSEHOLD buys $100,000 worth of goods from OTHER PLACES. We could make those same things for ourselves for $200,000 so this is far and away better for us to buy goods than make everything ourselves. Unfortunately, OTHER PLACES only buy $75,000 worth of services from my HOUSEHOLD. Thus my HOUSEHOLD has a $25,000 per year TRADE DEFICIT. After three years, my HOUSEHOLD owes $75,000, which is equal to our total annual revenue. After four years, my HOUSEHOLD owes $100,000 which is the total value of all goods we purchase. After 10 years, my HOUSEHOLD owes $250,000 which is is more than 3 years total HOUSEHOLD revenue. OTHER PLACES are reluctant to extend additional CREDIT and, faced with the possibility of starvation (my HOUSEHOLD can no longer purchase vital supplies), we default on the debt that we have no possibility of repaying and declare bankruptcy.
That's good. The only thing I would add is that the $25,000 trade deficit is not necessarily a debt on our part. If we spent at a trade deficit, using only money we had really earned, then as long as everyone is happy with the trade arrangements there need be no immediate problem. So after years, if you only spent money you actually made then while the other country would now have $250,000 of money they had a right to and we have all the goods and benefits we got in exchange and we are actually carrying no debt.

But if we do as we indeed do - buy on credit either by direct loans or credit cards, or we run budget deficits where we free up money to consume with and put off financing obligations we have voted for, then yes, your debt scenario becomes absolutely accurate. This is why you need to watch carefully when someone from a think tank comes on tut tutting about basic trade truths and then not explaining what is really happening.

And finally, in the best case scenario, the other country has amassed enormous wealth. The free traders point out and rightly so, that this allows them to improve their lives, open up interesting places to travel to, and buy goods in turn from us. Beautiful! But what if they hate our guts and use the money to improve and modernize their military capabilities. And this while we free traders gut our heavy industry and transfer the capacity to them because after all, doesn't the consumer in our country have the right to buy as cheaply as possible?
 

atpollard

Well-Known Member
That's good. The only thing I would add is that the $25,000 trade deficit is not necessarily a debt on our part. If we spent at a trade deficit, using only money we had really earned, then as long as everyone is happy with the trade arrangements there need be no immediate problem. So after years, if you only spent money you actually made then while the other country would now have $250,000 of money they had a right to and we have all the goods and benefits we got in exchange and we are actually carrying no debt.
However CASH is really leaving the economy. That was the cause of the Great Depression and the German economic crisis that led to WW2 (WW1 reparations drained Germany of capital vital for the economy to sustain the people). A "household" has no internal economy (like a nation) so 100% of the household imbalance was debt. However any national trade imbalance (net) is a drain on capital transferring it out of the economy and creating "opportunity costs".

In the case of the USA, we are foolish enough to have a Government steal capital from the economy with budget deficits at one end and allow capital to be transferred abroad with chronic trade imbalance from the other end ... a double economic gut-punch. Then we reward corporations with a tax and stock code/system that incentivizes short-term profit over structural growth (anyone remember the tax money to revitalize the steel industry that was used to diversify corporate holdings instead?)
 
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