Are Trade Deficits bad?

Whenever you turn on the news, the anchor always has a burrowed brow and says "The Trade Deficit has widened today…" This is to worry people about what?

Well let two Economist tell you. The first one is Oscar Varela in a letter to the editor at the El Paso Times:

"Regarding your opinion in “Trade deficit: China keeps beating up on U.S.” (12.24.2007), the U.S. trade deficit with China reflects the voluntary preferences by U.S. residents for Chinese goods. Efforts to punish China for the U.S. trade deficit would in the end punish these U.S. residents.   I (and others in El Paso) have a growing trade deficit with you, as every day I buy your paper but never sell you a thing. You are not beating me up, as my purchases are freely made without coercion. Would you support any efforts to punish you for my deficit through some government action that would restrict my pleasure in buying and reading the El Paso Times? "

The second one is from the Chair of the George Mason University Economics Department which he sent to the New York Times:

"Every month you report Commerce Department figures on the U.S. trade deficit with individual countries.  For example, we learn today that last year "[t]he trade deficit with China continued to rise, jumping by 10.2 percent to $256.3 billion" ("U.S. Trade Deficit Drops in 2007," February 14).

Before again reporting such figures, your reporters (and the Commerce Department) should ask a fundamental question: In this world of extensive multilateral trade and investment, of what conceivable relevance is a measure of the volume of good and services trade between any two countries?  America’s "trade deficit" with China is as relevant as is your "trade deficit" with, say, your columnist Maureen Dowd.  I’m sure that every year you buy more from her than she buys from you.  I’m also sure that you’re not bothered by this "deficit" – and for good reason: in a world of multilateral trade, no two entities are likely to have so-called "balanced" trade with each other."

Does this prove my point? Trade Deficits are not bad in anyway. Every American has a trade deficit as they buy goods from the grocery store, clothing store, or most any other store.

Now you no longer have to worry about this or this…China

Published in: on February 19, 2008 at 5:07 am  Comments (3)  

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3 CommentsLeave a comment

  1. “Trade Deficits are not bad in anyway” . . . I know significantly less than you do about economics, but I do know that a trade surplus (balance plus one for us) is optimal since this signals that exports are beating imports and we are able to produce more at a faster rate than our trading partners. If we have a surplus our GDP increases, which is especially important at there is a chance of recession currently.

    I think you can state that for America a trading deficit isn’t a terribly bad thing because of the size and dynamics of our economy. However, a deficit does have a negative impact and now that the dollar is weakening our exports are increasing and the FED is hoping this net increase in exports will also boost at GDP so we don’t have a recession.

    The problem with China is that it is voluntary association with their products, but through rational ignorance. The number of externalities dealing with Chinese goods is extremely high so there are even non-economic issues with trading so heavily with a communist country that produces poor goods. China will expand whether we trade with them or not, but if we can we should force China to fix this trading imbalance by somehow forcing them to respect American products (think Microsoft Windows).

  2. Trade Deficits just says that we are a developed economy… The point of being wealthy is that you can pay people to do other things for you.. first its food and clothes and then soon you are paying someone to wash your car and mow your lawn… so look at the U.S. as being this rich owner… while he is doing that he is employing many people who themselves are becoming wealthier by his transactions….

    You make good economic observance with the exports increasing because of a dollar weakening… but think about that exports rise while our currency is become less superior in the world market…. so you could say trade surplus is another sign of a weak currency

    As the FED might be hoping this will boost GDP, if you remember our GDP was the strongest when we had bigger trade deficits and stronger dollar.

    It is hard to say we should impose some type of standards to these Chinese goods, there are plenty of other countries that will take their factories and compete with them… as there are no other countries other than Taiwan and Thailand making little plastic toys remember if China makes a bad good then we will just buy from some where else…and this will allow other firms to enter the market…

    Thanks for the Comments!

  3. The production of goods and services require the production support of other goods and services. That production support is generally more from within rather than from beyond the producing nation’s borders.

    A nation’s trade deficit’s amount represents a decrease of their nation’s gross domestic production, (the GDP). Due to the loss of production supporting goods and services, the detriment to the GDP exceeds the amount of the deficit itself. Anything detrimental to the GDP is also detrimental to the nation’s median wage.

    In a more perfect universe, nations could immediately shift the employment of their resources, (their factories and other capital goods, and their labor) to replace trade deficit’s detriment to the GDP. That can not always or immediately be done for factories and machinery designed to produce specific products. Transferring the application of labor is most difficult.

    If we enjoyed a more highly educated labor force, economic displacement due to our trade deficit would be much less or of no difficulty. Many if not most victims of such displacement do not fully recover the loss of earnings throughout their life time. Their families share their loss.

    Economic displacement does induce some mobility but the USA’s population has always been mobile. Our children generally have not followed their parents occupations. We also move and/or change occupations for reasons other than displacement due to our trade deficits. Movement that’s attributable to our trade deficit does not rectify the deficit’s economic and social net harm to wage earners, their families or the nation.

    Warren Buffett wrote of a proposal to significantly decrease USA’s trade deficit. It’s market rather than government driven. It’s self funding, not a tax and grants governmewnt no policy discretion.

    Refer to

    Respectfully, Supposn

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