The joy of trade deficits

Yesterday I heard Pat Buchanan on CNBC lamenting our large trade deficit with Communist China.  I got a few good chuckles listening to him.  He’s been making a lot of political hay for many years with his pseudo-economic rant, and today I wasn’t surprised that he reminded us it was not just China, but “Communist” China he was talking about.  (Lou Dobbs does the same thing; they both like to imply that it’s bad enough for us to have a trade deficit with regular people, but it’s doubly disgusting when we have one with foreign people who are not only scary Chinese, but also “communists,” for heaven’s sake.  Sheesh, how low can we sink—corrupting communists by offering them capitalistic opportunities?) 

If you think anything like I do, you’ll really enjoy the potent antidote I found to the vitriolic drivel of the Pat Buchanan and Lou Dobbs types: Russ Roberts’ interview of Don Boudreaux, chairman of the economics department at George Mason University.  The interview is titled “Boudreaux on the Economics of ‘Buy Local’” and you can either download it or listen to it at this page.  Invest 55 minutes in this, because it’s well worth it.

One of Boudreaux’s supreme pet peeves is hearing someone complain about a bilateral trade deficit—i.e., a trade deficit with one specific country—and he expertly rips that argument to shreds.  (Example: If Pat Buchanan is upset by his country’s trade deficit with China, he must be really disgusted with his own personal trade deficit with his favorite grocery store—unless, of course, he hasn’t really thought through the economics of trade deficits very well.  I strongly suspect the latter, by the way, because Buchanan is a politician, not an economist.) 

Enjoy the Roberts/Boudreaux interview.  They explain why trade deficits are nothing to fear, as long as the sellers remain confident in the stability of the currency they accept in exchange for the goods they are selling us—and that’s the situation we have today.

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End note:
Russ Roberts is responsible for a cornucopia of educational interviews at EconTalk.  Also, Roberts and Boudreaux are co-writers of the Café Hayek blog. 

Comments

[ilsm]

Buchanan is raising the issue of competition between nations.

If you consider the 1930's, the US vis a vis Japan, our free trade actually strengthen the Japanese to the point that scrap metal came back to our battleships in the form of torpedoes.

Are they banking the bucks they will use to buy Russian or EU technology to defeat US?

Not that I agree much with Buchanan.

[Bob]

I didn't realize CNBC was still around. Never was my cup of tea.

One has to realize Pat is a cantankerous guy who will take on everything and anyone. Ever the contrarian he needs to be taken with a grain of salt. However, unlike the real politicians, he can be entertaining.

Steve, mental maps (I hate using the overused "paradigms") are very difficult to change. Even more so, I offer, when the subject is economics and all its' abstractions. So, while I personally do not see imminent danger from the trade deficit with China and absolutely no threat of military conflict, I do have some angst build up about how things will play out longer term.

Guess I'll just have to keep coming here to get my doses of optimism.

[Ironman]

I'll echo your recommendation of the Roberts-Boudreaux podcasts - the points debunking "buy local" are very well made.

And speaking of the US-China trade balance - if Buchanan or Dobbs were really paying attention to the data, they'd might have noticed by now that the growth rate of U.S. exports to China has been routinely exceeding the growth rate of China's exports to the U.S. since mid-2004. Ref: http://tinyurl.com/2djq7h (long post but scroll down for the charts....)

[Bob]

Thanks, Ironman.

See, I knew I can always count on a daily dose of optimism here.

[Steve]

What can China do with the dollars they accumulate with their bilateral trade surplus?

1. Buy stuff from us. Our reaction: "Thanks for creating US jobs."

2. Invest in real assets. Our reaction: "Thanks for helping us grow, and for increasing our tax base. We look forward to the extra taxes we'll collect from you."

3. Invest in financial assets. Our reaction: "Thanks for trusting us to invest your money wisely in our own growth and security."

4. Hoard the dollars. Our reaction: "Thanks for trusting in our currency more than yours, thereby making future inflation even less of a worry than it is now."

5. Dump the dollars for another currency. Our reaction: "Your masochism is puzzling; nonetheless, thanks for the goods you sold us before you caused the value of the dollar to drop a smidgen."

Any scenarios I forgot?

[Ariah]

Steve - Your response above is so delightful that I suggest you make it into a post of its own.

[Stephen Reed]

And contrary to how some argue that we are going into debt to fund our lifestyle (by selling our financial assets and debt to China in exchange for goods), the net worth of the country increased 3.2 trillion (Steve had a recent post on this earlier), despite giving some 800 billion of our assets to China to fund the trade deficit.

At that rate, there is no reason why this trade deficit could not oontinue on to infinity. It would be like having $100,000 worth of stocks and bonds that increase by 8% every year and then selling 3% of the total value of those stocks and bonds to someone else to fund my own consumption. I could do that forever.

Additionally, aren't exports actually the cost of receiving the imports from other countries? Wouldn't it be nice if you could personally receive more "imports" (goods and services from others) than the value of the "exports" (your own goods and services) that you have to give up to receive those "imports"?

[Ironman]

Steve,

I think you have the bases pretty-well covered from the "what do the Chinese do will all the dollars they accumulate" side of the trade equation.

From the "what do the Americans who export things from China do with all that stuff" viewpoint, I think I'll just observe that the people who actually do the exporting usually turn right around and sell it for more money than what they paid for it.

Who's getting hurt here again?

[Steve]

Bob:
I catch CNBC on XM radio in my car whenever the DJI is approaching 13000; otherwise, I surf the music channels.

Ariah:
Thanks, I'll post it in a few hours.

Stephen:
Yes, exports can be viewed as the cost of imports. If only we could convince our foreign vendors to hoard or burn all of the dollars we give them, instead of just a portion of them as I mentioned in this article:
http://tinyurl.com/38kwcy

[Also, thanks to whoever clued me in to tinyurl.com.]

[muirgeo]

Just curious Steve would you say the "science" is settled on trade deficits? Is there a consensus? Should we adopt the consensus? Should we adjust policy accordingly or should we wait for an absolute proof before we respond?

[muirgeo]

Listening to Boudreaux on the Economics. Absolutely fascinating but I'm pretty sure it's a scary view of the world they have were nothing matters but efficiency and profits.

For starters, I'm wondering how their "debunking" of buy local squares with the local economies of Joplin Missouri compared to Bentonville Arkansas.

Joplins economy is hurting. The only grocer is a Walmart superstore. And I've just heard some in-laws of ours local meat packing company is apparently going under after 30 years in business.

Boudreaux actually ask, "Why should we worry about the local economy?"

WHAT? That's scary. Why worry about the state economy, the Country's economy.

The two logical conclusions I get from these guys, three actually..

1) dependency is good and individualism and self sufficiency is bad and a fairy tail

2) Lets forget about countries and succeed all power to a few multinational corporations

3) If paving over the whole Earth painting it white, making all rivers cement canals and growing only corn and beef was the most efficient thing to do we should do it. Oh yeah and the 3 Multinational companies we would need would be ADM, Walmart and Exxon Mobile...no other companies or governments would be necessary.

I can not see how this is NOT the logical conclusion these guys base premises would result in....please prove me wrong!!

[Steve]

muirgeo:
Social sciences (eg, economics and politics) are a bit more difficult to "settle" than physics (eg, climate change). I have no hope that economics will ever escape the machinations of the political scientists... and I'm starting to think the same thing about the physics of climate change.