Is an Unfavorable Balance of Trade Really Unfavorable?

You probably think an “unfavorable balance of trade” is a bad thing.  But would you feel the same way if it were called a “favorable balance of goods and services.”

The definition of “unfavorable balance of trade” is when the value of imports exceeds the value of exports meaning we receive more goods and services (real value) than we give.  Of course that also means we pay more money (virtual value) to other countries than we receive.  Many people worry that this as an unsustainable and temporary advantage.  Seen as a continuous drain of cash from the American economy, many of my conservative friends compare this to their household budgets and what happens when they consistently spend more than their income.  This analogy seems to make sense; it just doesn’t match the facts.  The American economy has seen tremendous growth since WWII and we have never once seen a favorable balance of trade in that period.  By that theory, after a seventy-year “drain of wealth”, we should be dead broke.  The largest trade deficits have occurred since the year 2,000 yet the nation’s wealth has more than doubled in that same period.  Whether you personally realized this growth probably depends on your income bracket.  But the fact remains we are not seeing a drain of wealth to other countries even as wealth is redistributed to the top here at home. 

There can be little doubt this phenomenal growth is a result of robust trade and not as some will claim income redistribution.

Now I won’t pretend to understand the intricacies of macroeconomics that explain how this happens, but I don’t have to; the facts speak for themselves. I see a favorable balance of goods and services as a good thing.  It has served us well for 70 years.  I suppose there’s an optimal point for every set of conditions, but in a very strong U.S. economy there’s no reason to change course.  The Trump administration claims we have make “very bad” trade deals which are sending our jobs overseas.  There’s no doubt that some types of jobs will be lost to foreign competitors but it’s equally clear that some other jobs are gained.  Versatility of the American worker is what made America great and only versatility will make it great again.  It wasn’t that long ago when young men left the family farms to work in the steel mills which led to tractors replacing many more farmers.

Subsidizing obsolete and inefficient businesses just to save jobs is a losing battle.

President Trump’s plan calls for a tariff on steel of 25% intended to target China for “cheating.”  Now Obama raised the tariff on most Chinese steel to 500% in 2016 so it’s hard to fathom what this means.  Are we reducing it to just 25%; I doubt it.  Are we raising it from 500% to 525%; that doesn’t sound too bad?  Are we increasing the tariff by 25% which would make it 625%?  Or did Trump just make this plan up without any research?  I think the fact that the American steel industry can’t compete with China with the 500% tariff already in place is (in the President’s vernacular) just “sad.”  Maybe it’s easier to lobby for higher and higher tariffs than to modernize the steel mills. The American taxpayer gets to pay for it twice; first through the higher price of steel product and again through the jobs lost as exporting countries retaliate with tariffs of their own.  China, a major importer of soy beans might well target this for a tariff at the expense of the American farmer. Of course the Chinese have been modernizing steel mills for the last 30 years so we may have just fallen too far behind.  Never fear, this has happened before.  In 1985 Japan flooded the American market with cheap 64k computer chips and we threatened tariffs and sanctions to make American-made semiconductors competitive.  Instead we bought those “cheap-chips” to make affordable computers ushering us into the tech age with American companies dominating that market ever since.  We have argued that China began dumping cheap solar panels on the US market ten years ago, but these cheap solar panels have produced thousands of jobs for Americans.  Why not let car manufacturers, shipping container producers, HVAC and appliance companies buy cheap rolled steel to increase production and add even more jobs? 

And why do we cry “cheating” when we see a “bargain?” 

Imagine that Walmart put bread on sale at 50 cents a loaf, clearly below the going market.  Would you call it “cheating” and boycott the store?  Would you demand a $2.50 sales tax on Walmart bread so other bakeries could compete?  If Walmart developed cheap process for making bread, I would reward them by buying more bread from them.  If they’re selling bread at a loss, I consider it my duty to punish them by buying more bread from them. 

Some may choose to call it an “unfavorable balance of trade” when the value of goods and services received exceeds what we paid for them.  But most of us would call this a “bargain.”