Are “unfavorable” and “trade deficit” just words economists use to describe what they are measuring or should we heed the negative connotation attached to these words?
Certainly President Trump thinks an unfavorable balance of trade is a bad thing. You probably do too. But what if we called it “favorable balance of goods and services” instead? Would you still feel the same way?
The definition of “unfavorable balance of trade” is when the value to 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. I think 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 as shown on the graph below 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 jobs will be lost to foreign competitors but it’s equally clear that some other jobs are gained.