Oh, you could feel your way around. You could knock on any door, ah, yeah. Even when you turn them down, ah, there’s someone wanting more, more and more. Well, you got it made, you better shoot the fade. C’mon, get your balance –Balance. Keep your balance, oh, get your balance. Get your balance, oh –Balance. Oh, keep your balance. Oh, get your balance. Honestly, I don’t remember this one by Cars front man, and new wave artist, Ric Ocasek, but it was, oh, the 10th track on his 1991 solo album Fireball Zone.
There is a new wave in Washington these days as the administration of President Trump makes a number of 180 degree turns from the path of the last administration. While I personally agree with many of the pillars of President Trump’s economic agenda, one area where pretty much all professional economists, from orthodox Keynesians, to Austrian school economists, to classical economists like myself agree is that trade is good. And while it may be possible that many of us are confused by the Presidents many pronouncements in a number of areas, one thing is certain. He believes that trade deficits are in general bad, and that they are caused in a large way by bad trade policies. I, like most economists, disagree with this assertion; however, there are a number of things that the Administration can do to reduce the trade deficit that will also benefit Americans.
Let’s begin by understanding exactly what the balance of trade statistic is. The US Department of Commerce, releases balance of trade numbers as part of the National Income and Product Account data. The statistic is a simple one. It is simply imports of goods and services less exports of goods and services. If a country imports more stuff than it exports then it has a trade deficit, if it exports more stuff than it imports, it runs a trade surplus.
This seems simple; however, measuring the value of imports and exports can be difficult. The United States imports a lot of stuff and stuff is easy to measure. The value of oil (the country’s largest import) is easy to find out. The value of cars, dolls, shrimp and coffee, the same. These things are shipped in containers with manifests that state the value. On the other hand, the value of a lot of the country’s exports is difficult to measure. What is the value of software sold over the internet – and where is that reported? What is the value of legal services, design services, advertising services? Since the value of imports is easy to measure and the value of stuff sold is hard to measure, the trade deficit is generally overstated.
Ok, so even if the trade deficit is overstated, it is persistent and likely quite real. But what is the cause?
Well, simply put, Americans buy more stuff from abroad then we sell to people in other countries.
Traditionally, a large part of the trade deficit was the country’s demand for petroleum. Petroleum has accounted for between 15 and 20 percent of imports for years, with it only falling below 10 percent in 2015 as prices have been soft and domestic production has increased. But the United States simply cannot produce enough petroleum to meet demand at a reasonable price, so the country will likely always be a net petroleum importer. This is not going to change with trade deals, but may continue to decline as domestic production is encouraged (rather than discouraged as has been the case for the past 8 years.)
Another reason for consistent trade deficits is that the US economy is highly regulated in comparison to other countries. Environmental, labor, minimum wage, and other regulations add to the cost of producing products in the United States relative to say Mexico or China or Vietnam. Countries export when they have a comparative advantage in producing products or services relative to their neighbors. By increasing production costs in the United States, more and more countries will gain a comparative advantage and begin to export. It does not necessarily have to be cheaper to produce a shirt in Guatemala or Bangladesh, just relatively cheaper. Some would say that the United States is basically exporting pollution and injuries through its trade deficits and that may well be the case. A focus on deregulating business and ensuring that regulations are both necessary and effective would therefore help to reduce trade deficits without the expense being borne by consumers.
Third, there are simple financial reasons for the American trade deficit. Macroeconomists focus on the idea that trade deficits are the result of low savings rates in the United States. As this story goes, if investment in a country is greater than national savings, it must be financed by foreign capital, which must, in turn be matched by a deficit the current account (or a trade deficit). In other words, high demand for dollar based assets – be they US government bonds, or shares of Apple or Ford, or apartments in New York or Miami – increase the relative value of the dollar and therefore reduce exports and increase imports. While there is some truth to this, I believe that causality can flow either way, and foreign entities, flush with dollars received from exporting stuff have to use those dollars somewhere, and apartments in New York and Miami are safer than using them to purchase machinery to use in a factory in say Russia or Argentina. On the other hand, the kleptocrats in Russia, Venezuela and Iran have to stash their gains somewhere and US based assets are safe bets. So bad government policies around the world help to increase the trade deficit – and maybe a more active American foreign policy might help to reduce the deficit.
In the aggregate trade is good. It is stupid to produce bananas in the US when they can be inexpensively imported from Central America. One can’t produce scotch, or Bordeaux or champagne in the United States as these products must come from a specific geography, and it is not only bad policy, but it is cruel, to force hard working American families to pay more for clothing or furniture simply to make a statistic magically balance. But there are things that the Federal government can do – like reducing unnecessary regulations, or stopping corrupt foreign officials from hiding money in American real estate – that will both improve lives and reduce the trade deficit. As Mr Ocasek said, Oh, you could feel your way around, but, you got it made, you better shoot the fade. C’mon, get your balance –Balance. Keep your balance, oh, get your balance.