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April 12, 2018

The Great Myth of Trade Deficit


Here is a direct quote from one of President Trump’s recent tweets:

“From Bush 1 to present, our Country has lost more than 55,000 factories, 6,000,000 manufacturing jobs and accumulated Trade Deficits of more than 12 Trillion Dollars. Last year we had a Trade Deficit of almost 800 Billion Dollars. Bad Policies & Leadership. Must WIN again!"

It is a classic example of how selective facts can produce a wrong conclusion.

Here is the other side of that coin:

Fact check: Is Trump right about the size of trade deficit?

Trump persistently miscasts the trade balance, citing the U.S. deficit in goods and ignoring the U.S. surplus in services. The actual trade deficit last year was $566 billion. 
As for manufacturing, Trump leaves out what is widely regarded as the main reason for the decline in factory jobs - automation and other efficiencies. 
What he doesn’t say is that despite the loss of those 5.5 million factory jobs, the U.S. economy overall has added a net total of about 40.6 million jobs in that time.

Bottom line: The U.S. has been moving from “brawn" factory jobs toward “brain" office jobs. Is that a bad thing?

O.K., so Trump is ignorant and a compulsive liar. You already knew that. But what about that trade deficit. Would you say it is harmful or beneficial?

Think of where you’ve spent your money, this year. You’ve shopped at grocery stores, drug stores, clothing stores. You’ve gone to movie theaters, restaurants, ballparks, retail malls. Perhaps you bought a car. You might have shopped online.

In each case, you gave them money and in return, they gave you goods and services.

In short, you ran a “trade deficit" with every grocery, drug, and clothing store - with every movie theater, restaurant, mall, car dealer, ballpark, and online provider.

That is exactly what a “trade deficit" means. One party gives another party money in exchange for goods and services. After the exchange, which party “WINs" (to borrow Trump’s term), and which party loses?

Clearly, both parties win. It’s an even exchange, which both parties desire.

When you bought that loaf of bread, did you feel that you “lost"? If you had, you wouldn’t have bought the bread.

You wanted bread; the retailer wanted dollars; you both got what you each wanted.

That exchange just as easily could be termed a trade “surplus" as a trade “deficit," since you came out with a surplus of bread.

When the U.S. runs a trade “deficit" with the rest of the world, which we do almost every year, it doesn’t mean we have “lost." It means we have received valuable goods and services in exchange for dollars, which our Monetarily Sovereign government can create endlessly, at the touch of a computer key and at no cost.

When you personally engage in overly large trade deficits, i.e. buy too much stuff, you can run short of dollars to pay your bills. You even can go bankrupt, as Trump’s companies often have. The reason: You are monetarily non-sovereign.

Similarly, cities, counties, states, and businesses cannot run trade deficits endlessly, because being monetarily non-sovereign, they can run short of dollars.

But the U.S. is Monetarily Sovereign. It never can run short of its own sovereign currency the dollar. America never can run short of dollars.

The early settlers of our nation built and maintained their own houses; they grew and prepared their own food; they sewed their own clothing; they even taught their own children, in the home. They mostly were self-sufficient.

Now, in our modern society, you purchase your houses from home builders; you purchase your food from farmers and processors; you purchase your clothing; you pay people to do your plumbing, carpentry, landscaping, sewage removal, and road paving. You pay schools to teach your children.

When Americans were self-sufficient, they didn’t run trade deficits. They didn’t buy things. Today, you run trade deficits; you buy most of what you want from people who more efficiently can supply these things.

You buy from China, the things it can produce better or more cheaply, than comparable things, made here in America. Would it benefit you to purchase “Made in America" goods and services, if these goods and services were more costly or less useful than those made in China?

Trump claims that the U.S. should be a net importer of dollars.

If instead of having a trade deficit, we had a trade surplus, we would become a net importer of dollars - the very last thing this Monetarily Sovereign nation needs.

We would be sending our precious assets overseas in exchange for the one thing of which we have an infinite amount: U.S. dollars.

Finally, tariffs - both import and export - are not paid by China or the rest of the world. They are paid by you. The tariffs on imported goods are dollars added to the price. Those dollars leave the U.S. private sector and are sent to the federal government.

The same President who boasted about how much his tax cuts would benefit the economy now proposes tariff tax increases to - you guessed it - benefit the economy.

How increased taxes, which take dollars from the private sector and give them to the federal government, which has no need for them, can benefit our economy has yet to be explained.

And when China, and the rest of the world, institute their retaliatory tariffs against our goods, our factories and farmers either will have to cut profits to remain competitive or lose sales. Either way, the U.S. workers will be hurt.

I can understand why Trump wants this trade war. He is a stupid, vindictive, semi-literate man, who obtains his ideas from the stupid, vindictive people of Fox and Friends.

I even can understand why Trump’s followers buy into this economic catastrophe. They don’t understand the realities of international trade; they believe whatever their failed hero tells them.

What I cannot understand is the GOP members of the Senate and the House. These people know America will be hurt, but are too spineless to fight. They would rather see the people of America suffer than to displease this egomaniacal President.

In that sense, they choose their party over country, which makes them traitors to America.

May they be damned to eternal fires, especially the religious right, who while claiming morality, have sold their souls to the devil.

Courtesy of Rodger Malcolm Mitchell at nofica.com via Econintersect.com

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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