The Myth Busting Economist by Larry Malone

Should We Care About Trade Deficits?

Since it’s a presidential election cycle, we can expect that politicians seeking federal offices will be making hay about the size of our trade deficit. By the end of this column we’ll see that the only folks who should be making hay are the farmers finishing up the first cutting of the season.

What comes to mind when you hear the word “deficit?” The smell of irises and roses as we move through June and into July in gorgeous Central New York? No way! A glance at a thesaurus will list negative words like shortage, debit, scarcity, and insufficiency as synonyms. Such scarry words are why politicians love to rile up voters by chirping and pounding “trade deficit” into our heads.

What exactly is this presumably very bad thing called the trade deficit? It’s the difference between the dollar value of imported items (coming into the U.S. from businesses operating in other countries) and exported items (departing the U.S. from businesses operating in our 50 states).

Last time, we saw how U.S. consumers are paying higher prices from the tariffs in the Trump/Biden Trade War. Politicians want us to think that countries trade and that China, especially, is overtaking us in the international economy. We found out instead that the world is dominated by multinational corporations—large, medium and small. This is the first important detail to remember as we go about busting the myth that a trade deficit is a very bad thing.

The current trade deficit, coming in at $850 billion over the past 12 months, appears to be enormous. That number is the result of subtracting the total dollar amount of imported stuff ($3,931 billion) from exported stuff ($3,081 billion). This makes the $850 billion a negative number, and means $850 billion MORE stuff is coming into the U.S. than going out.

A crafty politician will rant that we should be producing that stuff here to create more jobs for Americans. The only thing accurate about the rant is that workers in other countries have jobs making things that we are consuming in the U.S. And it’s here where truth must win out over myth.

The U.S. is the largest economy in the world, by far. Our economy is one-third larger than China’s, which has a population more than four times bigger than ours. That means the average Chinese citizen is going to be much poorer than the average U.S. citizen.

So what if we yanked the jobs from Chinese folks working for U.S. firms in China in an effort to reduce the trade deficit? This is where the president who lost the 2020 election once again shares some common ground with the one who won it. Both think we need more Americans making stuff now imported from businesses in China right here at home.

Let’s name some names among the top American employers in China—companies like KFC, Apple, Nike, Starbucks, WalMart and Coca Cola. These American multinationals have a huge presence in China, and employ scores of Chinese workers to make and sell their products in both the United States and China, and dozens of other countries. Their goal is to satisfy their consumers, wherever they live.

Things get even more interesting if we ask whether Americans can do the work to make the stuff that ships from China. That would be impossible, because our unemployment rate is currently 4 percent. The average unemployment rate in the U.S. over the last 50 years was 6 percent, so the current unemployment rate is remarkably low. Economists say that any unemployment rate below 5 percent is considered full employment—meaning, “the best that we can do.” That’s because some workers choose to take time away from work, some are “between jobs,” and others choose to work seasonal jobs. Economists think that, in total, those folks make up about 5 percent of the labor force. That’s why there will never be a zero unemployment rate.

So where would all of those American workers come from if we were to make the $850 billion in extra imported items that we now consume from businesses in other countries?

The answer comes from Adam Smith in 1776, in his famous book, “The Wealth of Nations.” Smith pointed out that if there is full employment and a trade deficit, folks in other countries making those extra imported items are essentially working for us.

So our present low unemployment, rising incomes, and high-octane consumption mean Americans are employing fellow Americans AND a whole bunch of foreign workers making another $850 billion worth of stuff that we wouldn’t be able to consume otherwise!

Having a big trade deficit in a full employment economy, instead of representing economic weakness, is a BONUS. And with that, we’ve busted another myth. Instead of being a very bad thing, a big trade deficit means we get to consume all that our workers at home can produce, PLUS a windfall of items made by workers in other countries.

Larry Malone is professor emeritus of economics at Hartwick College.