Trade Deficits Can Be a Good Sign
The Census Bureau recently reported international trade data for 2015 that show imports exceeded exports by $532 billion, which is up 4.6 percent from 2014. Texas alone, while ranking first in exports at $251.1 billion, still imported $400 million more than it exported.
Some find these "trade deficits" worrisome. Intuitively, it seems bad that more money is leaving the country than is coming in. It also seems obvious that while exports support jobs here, imports support jobs abroad — justifying claims that a trade deficit represents jobs "lost" to places like China.
In reality, however, free trade is an enormous boon to human well-being, and the trade deficit is at most a minor concern. Some of the trade deficit does result from bad government policies, such as trade restrictions and currency manipulation. But efforts to fight those policies abroad could result in trade wars, which would do far more harm than good. The better approach is for each country, including the U.S., to focus on improving its own laws.
Free trade is based on an economic principle called "comparative advantage" that has revolutionized our lives. Since it's practically impossible for a person to be entirely self-sufficient given the demands of daily life, individuals benefit from voluntary exchange. This allows division of labor and specialization to flourish: Someone who's good at farming grows enough food to feed many people, while someone who's good at fixing sinks becomes a plumber.
There's something magical about trade between individuals in different countries — we no longer need to barter directly with our buyers and sellers. We trade goods and services with those in China to satisfy our desires while never meeting the people we transact with.
The data show that last year, the U.S. exported $2.23 trillion and imported $2.76 trillion in goods and services. We had trade surpluses with some countries, including Hong Kong and Singapore, and deficits with others, the largest being with China at $366 billion.
According to data collected from the Census Bureau but not yet fully publicly available, the two largest internationally trading states — Texas and California — represent almost 30 percent of total U.S. exports and imports. (They're just 20 percent of the U.S. population.)
Texas makes for an interesting case study, as it showcases a wide variety of trade phenomena. It's long been known as an oil exporter, but this year, exports of technological goods (28 percent of the total) surpassed petroleum-related goods (23 percent) for the first time. The benefits of exports are obvious enough: According to the International Trade Association, more than one-fourth of Texas' manufacturing workers depend on them.
But what about the state's $400 million trade deficit? If having imports greater than exports really made people worse off, there would be widespread unemployment and poverty. This misconception goes back to the mercantilist argument that isolationism and government export supports are the keys to prosperity. Rejecting this ideology has led to massive prosperity.
Simply, free trade allows Americans the ability to satisfy their desires by purchasing goods and services of better quality or lower price elsewhere. If that happens to lead to more purchases from other countries than they purchase from us, and therefore a trade deficit, then so be it.
Imports support job creation and are an essential part of a well-functioning economy. By importing cheaper electronic equipment from China, for example, not only do consumers pay less for the things they want, but producers also pay less for the technology they need to run their businesses. Collectively, this generates more economic activity in the U.S. than there would be otherwise.
There are legitimate concerns about the loss of jobs from trade, especially when it results from government intervention through international trade barriers, currency manipulation, and domestic public policy. But the more politicians push to address things like these abroad, the more likely they are to incite trade wars, and everyone will lose in the process.
Instead, politicians should start looking internally for policy changes to those hindering economic activity and trade. For example, a higher minimum wage raises the cost of production, thereby incentivizing producers to purchase goods from countries with lower wages. The highest corporate income tax in the developed world incentivizes producers to move to less costly countries and export their products to the U.S.
The lessons of comparative advantage still apply. The best path forward is to allow free markets to work.
Vance Ginn is an economist at the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin. He may be reached at firstname.lastname@example.org. Kiara Pillay is a research associate in the Center for Fiscal Policy at TPPF.