I’ve had to explain to several people what a trade deficit is, recently. It’s hard to say whether trade deficits are bad if you don’t understand what they are in the first place. So: What are trade deficits? And are trade deficits bad? I’ll try to explain this topic in the language of a non-economist. There is no reason for this topic to be confusing.
What is a trade deficit?
Having a trade deficit means your country buys more things from other countries than it sells to them. In the 1980s, this was actually a point of pride. I clearly remember my classmates pointing out that the United States consumes one quarter of everything the world makes. And as you may know, the United States doesn’t have anywhere near one quarter of the world’s population. The United States is a huge economy that punches way above its weight, population-wise.
The only way the United States could consume one quarter of the world’s production and not have trade deficits would be if the United States also possessed one quarter of the world’s natural resources and one quarter of the world’s factory production. The United States doesn’t.
There’s a misconception that a trade deficit means a country charges us money to sell stuff in their country. That’s not what it means. In 2017, the United States exported $2.3 trillion worth of goods and services. It imported $2.9 trillion worth. So our trade deficit with the rest of the world was $600 billion. That doesn’t mean we lost $600 billion. It just means we buy more stuff from them than they buy from us.
Why can’t other countries buy more from us? Maybe they could, but that’s less of our stuff that we could keep for ourselves to consume. There’s a cost to having zero trade deficits.
Trade deficit vs budget deficit
It’s important to note that a trade deficit isn’t the same thing as a budget deficit. Usually when you hear politicians talk about deficits, they’re talking about the budget deficit. The budget deficit is the amount of money the government spends above and beyond what it takes in.
Budget deficits aren’t related to trade deficits. Budget deficits are public money, funded by the taxes people pay. Trade deficits by and large are private money–money that belongs to the companies and citizens. The only way trade can affect the budget deficit is if a change in trade results in an influx of tax dollars.
Any time anyone claims it’s easy to make big changes to any of these things, be skeptical. I have a plan to eliminate the national debt. It’ll take 30 years and lots of people won’t like it though. I could make a plan to pay it off in eight years but it’s a waste of time. So could a lot of people. Why hasn’t anyone? It would be so unpopular its creator would never get elected to a second term. That’s why no one has done it.
Why trade deficits happen
Trade deficits usually happen because a country either can’t produce everything it needs and wants, or it’s cheaper to buy the things it needs and wants from elsewhere.
If the United States wants to consume a quarter of what the world makes, it’s going to need a quarter of the world’s natural resources, and an even distribution of them at that. The United States doesn’t have a quarter of the world’s natural resources and it definitely doesn’t have an even distribution of them. We have more soybeans than we need, for instance. So we sell soybeans to other countries. And we buy things we don’t have enough of. Those could be raw materials like petroleum. Or they could be finished goods like solar panels or laptops.
We used to make computers in the United States. We probably still would if consumers were willing to pay $1,500 for a new computer like I did back in 1994. It took a while to start making computers in the Far East and import them here, but once countries like South Korea had enough factory capacity to do it, computer prices fell rapidly. Today you can buy a computer for $500 and it’s better in every way than that $1,500 computer I bought in 1994. That’s why it’s not uncommon today for even a middle-class family to own several computers. The United States imported $128 billion worth of computers in 2017.
Televisions are another example. Thirty years ago my dad bought a 20-inch TV. I think he paid $300 for it, and that was such a good deal he bragged about it. We had three television sets and people thought we were super rich because most families had two. Today it’s hard to find a 20-inch TV because you can get a 32-inch TV for $100 if you shop around as carefully as my dad did.
Are trade deficits bad? It depends.
The other thing about trade deficits is that it matters what you’re getting. If you’re exporting iron and importing cars, that’s bad. It means other countries are turning that iron into steel and making cars out of them and selling them back to you. It means they’re making most of the money.
The United States doesn’t do that. The United States buys $128 billion worth of computers, but it exports $48 billion worth of semiconductors, so that full $128 billion doesn’t go into the deficit. Our companies turn nice profits on those computer chips. And we exported $778 billion worth of services in 2017. Services are extremely profitable.
While the United States buys a lot of cars from foreign companies, a large percentage of those cars are actually built in the United States. My Kentucky-built Toyota doesn’t hurt the trade deficit as much as pre-1980s Toyotas did, which were actually built in Japan and shipped here.
It would be nice if the United States had more factories and made more of its own stuff. But our consumers like low prices and our corporations like high profits. Since the unemployment rate doesn’t include people who’ve given up looking, we probably could come up with some factory workers if we had things for them to make. But we don’t.
How you “fix” trade deficits
The only way you turn a trade deficit into a surplus is by buying less stuff from other countries, or getting them to buy more of our stuff, or a combination of the two. The free market has worked out the balance we have today. If you want to do something contrary to the free market, it means regulation. One solution is for the United States to convince other countries to regulate and make its companies and citizens buy more of our stuff than they otherwise would. The easier solution is for the United States to regulate.
Normally, it’s liberals who ask for regulation.
You’ll get in trouble pretty quickly if you say regulation is always good. Some people say regulation is always bad, but without regulation, gas stations could put sugar and water in gasoline if they wanted. Society requires some degree of it. Regulation keeps water out of gas and gas out of water, keeping your car and you from dying.
The problem when you regulate consumer goods is that it results in higher prices. When prices go up, consumers have less money to spend. And you can’t control what they stop spending the money on. Propping up a homegrown television industry could wreck other industries unless that homegrown industry injects enough money into the economy to offset those higher costs.
There’s a theory that if we raised the minimum wage to $15, then people could afford to buy American again, and then manufacturing would come back here. I don’t know what the appetite is to test that theory, but that would be one way to reduce a trade deficit, and without regulation. Prices would increase but the increased wages would also mean people could afford the higher prices.
Are trade deficits bad for the United States?
So, are trade deficits bad for the United States? It’s an awfully hard argument to make, and I can’t find a reputable economist who tries.
Let’s look at whether the trade deficits are hurting the economy. The unemployment rate is around 4 percent and has been steadily dropping since the 2008-2009 recession. At any point in time, 4-5 percent of the population will be in between jobs, so everyone who wants a job by definition has been able to find one. We’ve been in that state since 2015. If we had 10 percent unemployment, we could argue the trade deficit was potentially costing us jobs. But ours isn’t.
Companies are profitable and the stock market is doing well. When companies are unable to sell their products abroad, you hear about it. We aren’t hearing those complaints right now.
So, you can either believe that unemployment numbers and corporate profits are good, and the trade deficit isn’t causing problems. Or you can argue that the trade deficit is causing problems and that unemployment and profits are a mirage. You can’t have it both ways.
If your favorite television program or other news outlet tries to confuse you by conflating a trade deficit and a budget deficit, call them on it. They’re using smoke and mirrors on you. If they try to make the concepts more complicated than they are, call them on it. You deserve honesty, and these aren’t difficult concepts.