Explaining The Meaningless Of Trade Deficits
- Thread starter Ponca Dan
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Someone please explain how there is a trade deficit. Let's do a hypothetical. Take two countries, America and China. Companies from America exchange $1 billion dollars for $1 billion dollars worth of widgets. And companies from China exchange $500 million dollars for $500 million dollars worth of thingamajigs. Where is the trade deficit? America now has $500 million and $1 billion dollars of widgets, which equals $1.5 billion. China, on the other hand, has $1 billion dollars and $500 million dollars worth of thingamajigs: $1.5 billion dollars. As a country America is richer because it valued the widgets more than the dollars. It prefers to have a billion dollars worth of widgets and 500 million dollars than merely having 1.5 billion dollars. China prefers to have a billion dollars and 500 million dollars worth of thingamajigs. Where is the trade deficit? How did America get ripped off?
Irrelevant as it regards a trade deficit, which is the subject of the thread.
The objection to trade deficits has always been that domestic jobs are being lost in exchange for cheaper consumption. You don't appear to address this objection and therefore you are unlikely to change anyone's mind on trade.
That's one of the objections. I may or may not change anyone's mind, that remains to be seen. I know I had my mind changed when economists explained the faulty thinking involved. All it takes is for someone to look at things objectively rather than emotionally. Politicians are very good at playing on emotions.
Don Boudreaux has been having a running commentary about “A Protectionist Is Someone Who ...”. Here’s the one from today:
http://cafehayek.com/2018/05/a-protectionist-is-someone-who-66.html
No, sorry, wrong link. Read the Boudreaux link above. (Although the HSH link is worth the read as well.)
My response is that while you can't protect our workers from all the vicissitudes of the market, you very easily can protect them from competing with workers making a $1.00 a day with no safety or environmental protections.
Or to put it differently, his examples are all of jobs being displaced by knowledge, technology and human progress, while jobs lost to trade are being displaced by paying someone else less.
So what? The job was lost. I doubt the worker who got laid off cared why he was laid off. You are trying to make a moral disconnection between the reasons for the job losses. There is no difference.
Turn the situation around. Suppose the employee found another job paying more money and benefits. He quits and moves on. Is that moral ?
No it has nothing to do with morality, it is a simple cost benefit analysis. The lost job is the cost, in one case the benefit is technological/human progress in the other case it is cheaper goods imported from a different country. Saying we should impose tarrifs on foreign made saddles to protect saddle maker's jobs is not the same as banning cars to protect saddle maker's jobs.
I don’t understand a single word of what you just wrote. I’m afraid you’ll need to dumb it down for me.
Aside from jobs:
The US buys $500 million in widgets from China.
China gets $500 million in cash.
China takes that $500 million and doesn’t buy goods from the United States with it.
The US buys $500 million in sprockets from China.
China gets $500 million in cash
China takes that $500 million and invests it in military equipment in the South China Sea to “protect itself”
The US buys $500 million in sporks from China.
China gets $500 million in cash.
China spends $450 million in purchasing strategic companies in the United States and $50 million “lobbying” senators and House members to approve it.
At the end of the day, we Americans have $1.5 billion dollars worth of trinkets and China has $1.5 billion US dollars to spend on furthering it’s own interests that may or may not align with the US’s own interests.
The US buys $500 million in widgets from China.
China gets $500 million in cash.
China takes that $500 million and doesn’t buy goods from the United States with it.
The US buys $500 million in sprockets from China.
China gets $500 million in cash
China takes that $500 million and invests it in military equipment in the South China Sea to “protect itself”
The US buys $500 million in sporks from China.
China gets $500 million in cash.
China spends $450 million in purchasing strategic companies in the United States and $50 million “lobbying” senators and House members to approve it.
At the end of the day, we Americans have $1.5 billion dollars worth of trinkets and China has $1.5 billion US dollars to spend on furthering it’s own interests that may or may not align with the US’s own interests.
You are calling the widgets, sprockets and sporks trinkets. Maybe they are and maybe they are important ingredients necessary for something being produced in America. It really doesn’t matter. The buyers in America preferred the trinkets over the money. It is their money, not “ours” and they can do what they want with it. From a pure “balance sheet” point of view there is no trade deficit. One side got trinkets, which it preferred, and the other side got money, which it preferred.
I am trying to imagine what a service only industry in the US looks like and being a country incapable of building or making anything and only able to consume and just importing everything we consume. What are a bunch of Doctors, accountants, and lawyers going to do if those are the only good paying jobs left?
When I was growing up we dreamed about what we would build, improving your bicycle, a motorcycle, or fixing up an old car at 16 with your older brother and dad and we actually worked throwing a paper route before we were 10 and then working at gas station in grade school to save money to build things. Today’s kids grow up dreaming about what they can buy and when their bike breaks they think it is time for a new one and do not even think about fixing it. Many HS graduates can not even use a ruler, what can you build not knowing how to use a ruler or turn a wrench?
When you cannot take raw materials and make something worth far more eventually we will be reduced to farmers and living in the dark ages since the only skill we will need for
survival is how to raise plants and animals, which sadly is also becoming a lost skill and is not easy.
IMO, we should use trade intelligently and fairly to restore our manufacturing base it is one of the keys to being a world power militarily because if our weapons are made overseas we are at risk, and we need to be able to ramp up our production in the event of war.
If you are wanting to maximize wealth in this country we need as much of the wholesale and retail side of the profit equation in every industry to stay in this country. That is just not jobs, that is total return on investment. Fair trade gives us a chance to compete fairly and will keep more jobs in the US but most importantly the ownership interest, the capital appreciation, and the cash in this country and raise the wealth of US citizens. Budweiser is now foreign owned, maybe that should not bother me but it does. We still have jobs, but capital appreciation and business profits now is creating wealth in a foreign country and addicted drunk consumers in our country.
Trade is a part of a larger conversation. We owe foreign countries nothing, if we want the poor to rise we do not need “living wages” at McDonald’s like Obama wanted, you need to be able get a job in which you have a skill that you are assisting in real wealth creation, either in a service industry or in manufacturing and technology.
When I was growing up we dreamed about what we would build, improving your bicycle, a motorcycle, or fixing up an old car at 16 with your older brother and dad and we actually worked throwing a paper route before we were 10 and then working at gas station in grade school to save money to build things. Today’s kids grow up dreaming about what they can buy and when their bike breaks they think it is time for a new one and do not even think about fixing it. Many HS graduates can not even use a ruler, what can you build not knowing how to use a ruler or turn a wrench?
When you cannot take raw materials and make something worth far more eventually we will be reduced to farmers and living in the dark ages since the only skill we will need for
survival is how to raise plants and animals, which sadly is also becoming a lost skill and is not easy.
IMO, we should use trade intelligently and fairly to restore our manufacturing base it is one of the keys to being a world power militarily because if our weapons are made overseas we are at risk, and we need to be able to ramp up our production in the event of war.
If you are wanting to maximize wealth in this country we need as much of the wholesale and retail side of the profit equation in every industry to stay in this country. That is just not jobs, that is total return on investment. Fair trade gives us a chance to compete fairly and will keep more jobs in the US but most importantly the ownership interest, the capital appreciation, and the cash in this country and raise the wealth of US citizens. Budweiser is now foreign owned, maybe that should not bother me but it does. We still have jobs, but capital appreciation and business profits now is creating wealth in a foreign country and addicted drunk consumers in our country.
Trade is a part of a larger conversation. We owe foreign countries nothing, if we want the poor to rise we do not need “living wages” at McDonald’s like Obama wanted, you need to be able get a job in which you have a skill that you are assisting in real wealth creation, either in a service industry or in manufacturing and technology.
And in the real world, cash has utility. One side has cash and the other has.....stuff. Stuff that at one time would have been produced here.
Also in the real world, it’s not just a one time transaction in a static environment. If we as a whole, no longer produce goods or services that anyone wants, where do we get the cash to trade with other parties?
Interesting comment. A lot to ruminate on. However it has no connection to the supposed trade deficit. You may not like the economic direction you see our country taking. But that does not reflect in any way on a trade imbalance. America receives an equal dollar amount of products for the dollars it spends. It balances to zero. As a trade we have a money deficit and a product surplus.
Where are you getting the idea we aren’t producing things? We produce (manufacture) more now than at any time in our history.
The big controversy has been over Trump’s tariffs on steel and aluminum. Do you consider those items to be trinkets? What do you think we are doing with all that steel and aluminum? We’re manufacturing products!
When you have nothing to trade in return for cash eventually you become a whore, all that is left is selling your body as a slave. Trade policies have definitely influenced the loss of our manufacturing base. Cash is king, it is the first item on the balance sheet, it is the most liquid and has the most utility, only cash can create emergency reserves. Inventory of stuff is further down the balance sheet, it costs money to house, insure, and finance and most material things depreciate over time and can lose utility quickly as it ages. The “stuff” in my house costs me money to run, insure, and house, and it is depreciating fast. The cash I have invested is working for me, I hope one day I do not have to work for cash and can retire because cash is working for me.
Cash is king, business 101.
Sorry, guys, I’m down for the night . The Cardinal game is about to start. I’ll be happy to pick this up again in the morning if you want. Leave your comments and I’ll try to respond tomorrow. Go Cards!
