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Friday, March 29, 2024

The absurdity of trade deficit fears

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When the value of a country’s imports exceeds its exports, a trade deficit results. Sales of Philippine-made goods abroad dropped for the fifth consecutive month while imports rose for the 10th straight month in May, resulting in a wider trade deficit of $3.7 billion, the government reported last Tuesday.

This brought the trade deficit from January to May to $15.8 billion, up from $10.8 billion in the same period in 2017. The trade gap resulted in a current account deficit as more dollars were spent, which was worrying the market and was partly to blame for the weaker peso. The wider trade deficit was cited in the press and social media as proof that trade policies of the Duterte administration were not working and could hurt certain sectors in the long run and lead to fewer jobs.

The fact is the demand for imports rises with income, so imports normally tend to rise faster than exports when a country expands more rapidly than its trading partners. The trade deficit is a symptom of rising employment—not the cause of rising unemployment. The unemployment rate dropped to 5.5 percent in the second quarter of 2018 from 5.7 percent a year ago. The number of unemployed persons went down by 83 thousand to 2.36 million while the number of employed increased by 625 thousand to 40.9 million.

People fear trade deficits because they think it’s a sign of weakness—like a company losing money. However, fears of trade deficits are baloney. Trade deficits are meaningless. Trade deficits alone signify nothing about a country’s health and wealth.

If tomorrow the Philippines became the 51st state of the United States, we would no longer be aware of any trade deficit or surplus involving it and the United States. Who knows what the trade picture is between New York and California? Who cares? I don’t either. If it makes sense to worry about the deficit between the Philippines and the United States, then maybe we should worry about the deficits among the states, or the deficits among Philippine provinces. Maybe Makati City has an intolerable deficit with Cagayan de Oro that we’re not being told about. Neighborhoods can have deficits too. Come to think of it, I have a huge deficit with my favorite convenience store. I spend money there, but they buy nothing from me. On the other hand, I rarely purchase things from people who do buy from me. Are we wrong not to worry about these bilateral deficits? Would it make sense to strive to have all bilateral trade relations balance out? The fact is, if the balance of trade doesn’t matter at the personal, neighborhood, or city level, it doesn’t matter at the national level.

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The quote of the day comes from the 5th edition (2015) of Thomas Sowell’s Basic Economics:

“At one time, it was believed that importing more than was exported impoverished a nation because the difference between import and exports had to be paid in gold, and the loss of gold was seen as a loss of national wealth. However, as early as 1776, Adam Smith’s classic The Wealth of Nations argued that the real wealth of a nation consists of its goods and services, not its gold supply.”

Too many people have yet to grasp the full implications of that, even in the twenty-first century. If the goods and services available to the people are greater as a result of international trade, then people are wealthier, not poorer, regardless of whether there is a “deficit” or a “surplus” in the international balance of trade.

And it doesn’t matter how Filipinos (or, more generally, how denizens of whatever country is considered to be the “domestic” one) gain greater access to goods and services produced globally.

If the Chinese become zealous devotees of a religion whose doctrine requires that they serve Filipinos by shipping to Filipinos goods and services free of charge, then Filipinos are made better off.

If the Chinese innovate in ways that lower their costs of production and distribution and, thus, enable them to sell goods and services to Filipinos at lower prices, then Filipinos are made better off.

If the Chinese invent new products and offer to sell these new products to Filipinos at prices that Filipinos find attractive, then Filipinos are made better off.

If the forces of international competition oblige Chinese producers to lower their export prices to levels closer to their costs of production, then Filipinos are made better off.

If the Chinese government forces Chinese citizens to subsidize the production of goods and services sold to Filipinos so that Filipinos can purchase these goods and services at artificially low prices, then Filipinos are made better off (although Chinese citizens, other than those involved in the export trade, are made unjustifiably worse off).

If the Chinese monetary authority buys Philippine pesos with newly created yuan in order to (temporarily, out of necessity) make Chinese exports artificially inexpensive for Filipinos to buy, then Filipinos are made better off (although Chinese citizens, other than those involved in the export trade, are made unjustifiably worse off).

The above reality is missed by people, such as Donald Trump (but hardly limited to him), who judge trade to be “successful” only if the jobs and businesses that it visibly—that is, directly—creates in the domestic economy are perceived as being greater than the number of jobs and businesses that it visibly destroys.

This error is among the oldest and most difficult to kill in economics—not only because this error is serviceable to domestic producers who greedily seek protection from competition, but also because it appeals to people who refuse to think beyond what is immediately and blindingly obvious.

In sum, because the nature of trade is to produce mutual benefit, there can be no such thing as a “trade deficit.”

eric.jurado@gmail.com

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