Tuesday, February 23, 2016

The Un equality of Free Trade

The current crop of political candidates are lamenting on the trade imbalance. For example, the United States, as per the political candidates, has a trade imbalance with China and other nations. Is this an accurate assessment?  How can a trade between two parties be imbalanced?

Free Trade is always imbalanced

With Trade, it is an imbalanced transaction. For example, if two parties are engaged in a trade, let us state it is for eggs from a grocery store, the grocery store owner values the eggs less than the dollars given to them by the customers. The dollars hold a higher value than the eggs, if the eggs held a higher value, they would not be sold for that said price for those dollars. Conversely, with the customer, the customer values the eggs more than the dollars given to the store owner.

Trade Deficit

When politicians scream about the "Balance of trade", this is a false claim. It is based in the old mercantilism argument that trade must be "balanced", and if not, dire economic consequence must follow. I have shown, on this web site,  with this article, that this matter is of no concern. Both sides benefit from the trade, yet both sides value their respective trade items differently. However, from an accounting point of view, the trade is balanced.

Why is this myth still around?

There is a variety of reasons this myth still exists. However, the primary reason is the following: Many politicians view themselves as a dues ex machina with the citizens. When unemployment hits hard with some citizens, these citizens lose their jobs, or the company goes bankrupt--they are searching for reasons to explain their loss. Enter the politician: He comes in with a cacophony clarion call to appeal to these lost souls. His reasoning is rooted in a xenophobic message, while simultaneously saying that "I can make America great again!". These message resonates deeply with these individuals, creating an emotional connection. Once this politician is elected, and he implements higher tariffs, price controls, and the like, for example, it simply makes matters worse.

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