Trade Deficits: A Poor Focus for Public Policy

On June 3, 2018, the Appleton Post-Crescent published the below guest column.  The hard-copy edition does not contain either the graphics or hyperlinks provided here.

President Trump views trade deficits in goods (imports greater than exports) as bad for the US and claims policy should be directed at reducing the total of $811 billion excess of imported over exported goods in 2017, with a particular focus on reducing the $375 billion goods deficit with China.  Current U.S. trade policy often serves special interests (e.g., steel, sugar, or textiles) but negatively impacts most of us. Viewed in isolation, a trade deficit is neither bad nor good but depends upon both how it is measured and a country’s economic circumstances.

To understand trade deficits, consider the following.

Without such investments, interest rates would be much higher.

The objective of trade policy should be to increase the economic well-being of a country’s residents including those who lose jobs or income in the process.  This can be best achieved by using domestic resources as efficiently as possible. Neither the balance of trade nor payments yields enough information for effective public policy.

Of course, efficient resource use changes employment and purchasing; thus, in most cases, American producers or consumers should purchase goods from another country if they offer greater value.  Trade, however, can have negative consequences, such as increased pollution or use of indentured labor, which should concern policy makers.  President Trump chose to withdraw from the Trans-Pacific Partnership treaty which included provisions to inhibit these effects.

Exports are not necessarily good nor imports bad for a country’s economic well-being. Trade deficits can be bad if they induce consumption to grow faster than income, thus, increasing the chances of an economic crisis. Trade deficits can be good if they enable a country to increase productivity and, thus, the standard of living for its residents.  Productivity improvements take time, and the net gains from trade should be shared with those who, as a result of such trade, lose employment or income.  These consequences, however, should not be treated any differently from those generated by technological change, which causes many more people to lose employment and income.

Trade deficits are neither good nor bad. Public policy focused expressly on trade deficits, whether with specific countries or in total, is likely to lead to reduced not increased economic well-being.  For Argentina, which consumes well beyond its economic means, trade deficits are bad; for the U.S., the effects are much less clear. Thus, it is best to follow the Hippocratic idea: “first, do no harm.”

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s