Balance of Trade

Contents
Balance of Trade

“Balance of Trade is the difference in value over a period of time between a country’s imports and exports of goods and services.” (britannica.com/topic/balance-of-trade)

President Trump, July 26, 2018

“We lost $817 billion a year, over the last number of years in trade. In other words, if we didn’t trade, we’d save a hell of a lot of money.”

Adam Smith, Wealth of Nations, 1776

“Nothing, however, can be more absurd than this whole doctrine of the balance of trade… When two places trade with one another, this doctrine supposes that, if the balance be even, neither of them either loses or gains; but if it leans in any degree to one side, that one of them loses and the other gains in proportion to its deviation from the exact equilibrium. Both suppositions are false.”

First Scenario
  • Suppose last year Ford bought 1 million dollars worth of tires from Goodyear for its new cars.  Also suppose that last year Goodyear bought 800,000 dollars worth of Fords for its salesforce.
    • Did Ford lose $200,000 to Goodyear last year?
    • Was it bad that Ford spent more money buying tires from Goodyear than Goodyear spent buying cars from Ford?
Second Scenario
  • Suppose last year Ford bought 1 million dollars worth of air bags from Ventana Serra in Mexico.  Also suppose that last year Ventana Serra bought 800,000 dollars worth of Fords for its salesforce.
    • Did Ford lose $200,000 to Ventana Serra last year?
    • Was it bad that Ford spent more money buying air bags from Ventana Serra than Ventana Serra spent buying cars from Ford?
    • Did the US lose $200,000 to Mexico?
    • Was it bad that the US spent more money buying stuff from Mexico than Mexico spent buying stuff from the US?
Business vs Buying
  • You make money in business if revenues exceed expenses.  And you lose money if expenses exceed revenues.
  • Buying something is spending money in exchange for goods and services.  A purchase is a good deal if you paid less than market value and a bad deal if you paid more.  But you don’t make or lose money on a purchase (by itself) in terms of revenues and expenses.
What Is the Trade Deficit?
Neil Irwin, New York Times
  • “Imagine a world with only two countries, and only two products. One country makes cars; the other grows bananas.
  • People in CarNation want bananas, so they buy $1 million worth from people in BananaLand. Residents of BananaLand want cars, so they buy $2 million of them from CarNation.
  • That difference is the trade deficit: BananaLand has a $1 million trade deficit; CarNation has a $1 million trade surplus.
  • But this does not mean that BananaLand is ‘losing’ to CarNation. Cars are really useful, and BananaLanders got a lot of them in exchange for their money.”
Trump’s trade policy is stuck in the ’80s — the 1680s
Catherine Rampell, Washington Post
  • Adam Smith showed that real national wealth doesn’t come from amassing piles of gold, which are transitory. Wealth comes from increasing productivity — that is, by figuring out how to make stuff more efficiently, which permanently increases living standards.
  • How do you increase productivity? By specializing in what you do well and honing your skills in that area. Then you trade with other people who do other stuff well. Through these transactions, over time, everyone gets richer.
  • In other words: Trade is not zero-sum; it’s positive-sum. 
Autarky (AWE-tar-key)
  • britannica.com/topic/autarky
    • Autarky, an economic system of self-sufficiency and limited trade. 
    • A contemporary example of extreme autarky is North Korea’s system of juche (Korean: “self-reliance”).
    • Autarkic systems are the opposite of liberal economic systems, which encourage the free flow of goods and services. 
    • A wide range of theoretical studies published in the centuries following the pioneering works of Adam Smith and David Ricardo, as well as the rapid globalization of the world economy following the end of the Cold War (1991), further established the economic superiority of free trade and caused autarky to lose its appeal as a viable economic system among most countries.