A thought experiment, dear reader, on how to think about international trade and its impact on the wealth of a nation.
Suppose one day, every country in the world suddenly said, in unison, “Hey America! We’ve decided we think you’re just the best and to show how much we love you, we’ve decided that from now on we’re going to send you 10% of everything we produce, free of charge. And in return, you don’t need to send us anything at all! Everything you produce, you can keep for yourselves. Plus, you also get the benefit of everything we send you!” Suddenly Americans are receiving cars, books, electronics, food, and so on, all free of charge. If other countries decided to send us lots of valuable stuff for free, wouldn’t that be great? (Great for Americans, anyway – not so great for the citizens of those countries.)
Now, imagine the opposite scenario unfolding. Every country on earth decides to say “Hey America! We think you’re absolutely awful and we’ve decided that from now on, you must send us a tithe consisting of 10% of everything you produce, for which we will send nothing in return. Everything we produce, we will keep for ourselves.” Now, many goods and services that are produced by Americans no longer are able to be consumed by Americans, nor do any Americans consume goods or services produced elsewhere in the world. If we were sending lots of valuable stuff out to the rest of the world but not getting any stuff in return, wouldn’t that be lousy? (Lousy for Americans, anyway – but pretty great for the citizens of those other countries.)
New scenario time. It’s the same as the first scenario, only instead of sending us stuff for free, every country in the world decides to send American all this stuff in exchange for 1% as much stuff from us as we are being sent. Getting lots of stuff in exchange for giving up very little stuff isn’t quite as nice a deal as getting lots of stuff for free, but it’s still really good.
Last scenario – same as the second, but instead of forcing Americans to send 10% of what we produce in exchange for nothing, all the other countries in the world agree to send Americans 1% as much stuff as Americans send them. Sending away lots of stuff and getting only a tiny amount of stuff in exchange isn’t quite as bad as sending away lots of stuff while getting nothing at all – but it’s still a lousy arrangement.
But what if I told you that in the first and third scenarios above, America would actually be running a trade deficit with the rest of the world, while in the second and fourth scenarios, America would be running a trade surplus. Does that suddenly change which scenarios are good or lousy? Clearly not. The trade deficit situations are still much better to be in if you’re an American citizen, and the trade surplus situations are still pretty awful. In the trade deficit scenarios, Americans can consume all (or nearly all) the goods and services they produce plus even more on top, while in the second scenario Americans consume fewer goods and services than they produce, and lack (or barely gain) an offsetting benefit of goods or services produced elsewhere.
In international trade, imports are benefits and exports are costs. Paul Krugman put it well when he said “imports, not exports, are the purpose of trade. That is, what a country gains from trade is the ability to import what it wants. Exports are not an objective in and of themselves: the need to export is a burden that the country must bear because its import suppliers are crass enough to demand payment.” A country that is running a trade deficit (or, put another way, a country running an investment surplus) is a country where citizens get more goods and services from foreigners than those citizens send away for foreigners to consume.
Those who claim Americans would benefit if only we exported more goods and services while importing fewer would have to conclude the second and fourth scenarios actually enrich Americans while the first and third impoverish us. Too many people think a trade deficit is in some way analogous to a household running a budget deficit. If I’m consistently spending more than I’m making, my household budget is in a deficit and if that goes on too long, things will end very badly for me. People hear “America is running a trade deficit” and think it means America is like a household that is spending more than it is making, but that’s simply a category error. Trade deficits and budget deficits describe things that are categorically unlike each other. The idea that a country running a current account deficit in trade is in any way analogous to a household spending beyond its means, and the populist movements inspired by such muddled thinking, has to be among the most damaging of all the common economic myths out there.
