Trade Deficits Indicate Prosperity

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The Trump administration has launched a full-frontal attack on America’s trade deficit with the rest of the world.  The weapon of choice in what is evolving into an all-out trade war, has been to impose punitive tariffs on a host of products, most notably steel and aluminum. Predictably, Newton’s third law of physics, which states that for every action there is an equal and opposite reaction, applies here, as our trading partners have responded in kind with tariffs of their own.

The headline number is the dollar value of goods and services imported versus goods and services exported. In 2017 the trade deficit was $568 Billion. Lost in the headlines, is the fact that United States exports increased by 5.6 percent during the year to the tune of $2.6 Trillion.  Imports increased 6.9% to $2.9 Trillion.

This overall combined increase of over 6% is simply an indication of robust economic activity, particularly in the United States. Witness the year’s economic benchmarks of real GDP growth, inflation, equity prices, manufacturing output, civilian employment, the unemployment rate – all displaying positive numbers signifying a healthy economy.

Meanwhile the Trump administration is complaining that the trade deficit of $568 Billion translates into 3.5 million lost jobs here at home, most of which would be in the manufacturing sector. At the current unemployment rate of 3.9%, it is not clear where these workers would come from. Further, even if these jobs were repatriated, the higher cost of labor to produce the same goods in the U.S. would cause their prices to skyrocket.

So, aside from the positive effects of imports and their role in checking inflation, they also contribute to our economy in other ways.  Dollars used to purchase imported goods do not just disappear or get stuffed under some international mattress. They continue to circulate in the world economy and eventually find their way back to the United States.

For example, when an American buys a Japanese made Toyota or a Korean made washing machine, dollars flow to the respective country. The dollars received are eventually reinvested to purchase assets in the United States. Those assets include Treasury bonds, stocks, real estate – all of which support our economy and keep interest rates low. If a country chooses not to reinvest in the United States, it will sell the dollars in world currency markets to other countries that will. Without these dollars circulating in the world currency markets, the value of the dollar, relative to other currencies, will rise making our exported goods even more expensive to foreign consumers.

So, there you  have it. This may be a rather simplistic view of the complexities of world trade, but it is intended to be just that – simple.  Building barriers to free trade using tariffs accomplishes nothing and will just make everyone worse off.  American businesses rely on low cost imported raw materials to remain competitive and the American citizens enjoy the lower cost of imported consumer goods.

In conclusion, I would argue that a trade deficit is not a sign of economic distress, but quite the contrary. It is a sign of a healthy economy evidenced by the fact that every recent U.S. economic expansion has been accompanied by an expanding trade deficit.

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