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Thursday, February 25, 2016

More Thoughts on Free Trade

Free Trade: The process that benefits us all. Many political knaves rant and rave about having trade deficits with other nations. They speak of the "trade imbalance", and something must be done to "protect American" interest. To those who are not steeped in the understanding of economics, this argument, prima facie, seems plausible. However, this polemic, quite frankly, is balderdash. The ones, who seek to intervene in the process known as Free Trade, simply lack the economic understanding of some fundamentals.

Trade takes place with individuals, with not Nations

When one purchases an item from the store, that product may have been made in China, Mexico, Vietnam or some other country outside of the U.S.  However, that product was sold by an individual, not a nation. That "individual" maybe a corporate entity, but the fact still remains the "nation" did not "sell" this product. Once one begins employing economic analysis, with the notion that we trade with nations, it becomes quite apparent this position is false and misleading. Individuals purchase products based upon their desire to pursue their individual objectives. Private firms go into business to earn a profit. This profit is used to expand the enterprise, pay back investors, etc. etc. Customers purchase these goods to benefit their well-being.

Trade Deficit is Hogwash

This fallacious notion of a "Trade deficit" is as old as the hills. The entire notion of mercantilism embraced by the elites believed a nation's wealth was based on the amount of Gold it held. If there was a imbalance of trade with respect to Gold, typically this imbalanced was made "balanced" by employing some sort of tax or tariff on foreign goods. Many of the classical economists, such as Adam Smith, David Ricardo, David Hume and others, argued vehemently against mercantilism, as they believed it was detrimental to the citizens of the "mother" country.  Fast forward to the 21st Century, mercantilism still is alive and well. Modern believers in mercantilism want to "punish" China, for example, for selling their goods at a lower price. Using their logic, American consumers should pay higher prices for goods. These modern acolytes of the mercantilism cult do not say this explicitly, however, their desire to have tariffs demonstrate that these folks want that objective.  The use of tariffs simply restrict the inventory of that said good in the marketplace, and with the same level of demand, prices will rise.

With respect to the notion of a trade deficit, this myth has been addressed on this blog ad nauseam. Let us take the example of China. Many Presidential candidates, specifically Donald Trump, claim that China has an imbalance of trade with the United States. If trade is simply measured on the same goods that are sold to the buyer, and if the seller buys those same goods from the buyer, then there will be a trade imbalance. Simply put: I purchase bananas from my grocery store. Yet, my local grocery store does not purchase bananas from me. Thus, there is a trade imbalance, in terms of bananas.  However, the dollars, which act as a measure of accounting, demonstrate that there is no trade imbalance. If you pay $1.00 for bananas, the store receives the $1.00, you receive the bananas. It all balances out using regular bookkeeping logic. Also consider this:  Both parties value their items differently. The Store values the dollars more than the bananas, and the buyer values the bananas more than the dollars. Both parties win. While this seems to be a simplistic example, this holds true at the macro level. Chinese firms sell their goods or services, and in exchange, we give those firms our US dollars. The Chinese firms can re-invest those dollars and expand their enterprise; this benefits them in the present and the long run. The US Consumer has the pleasure of obtaining a product to enjoy.  In the notion of free trade, both parties benefit.

Trade deficit between States in the United States?

Since these politicians seek to speak ill of the "trade deficit" between China and the United States, why not complain about the trade deficit between States? Or between counties? Or between Cities? Is it right to argue that Nevada has a "trade deficit" with regards to Gambling, as compared to Utah? Is it wrong to argue that Idaho has a trade imbalance with regards to potatoes compared to Texas?  No one would argue for such foolishness. Yet, this argument is equally as risible as arguing about the trade imbalance between China and the US, or the US and any other nation.

Conclusion

Having a trade deficit with China, or any other nation, is simply a mythology. We have a trade deficit with our local grocery store, Gas station, Electronics Store, and the like, since none of those stores buy from us those exact same goods. Yet, in exchange, they take our dollars for those goods. This eliminates the "deficit". Also, we never hear about a deficit between states, or cities, or counties. This sort of speak is simply reserved for histrionic talk to get voters emotionally engaged to a particular candidate.



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