trade deficits

No wonder people are confused about the trade issue when they read mercantilist articles like the front-pager by Howard Schneider in the Washington Post today – “Economic growth slowed by trade gap.”

According to this article’s premise, it sounds like we would all be better off if we just exported and didn’t import any goods and services.  Here’s the article’s lead sentence:

A widening U.S. trade deficit has become a substantial drag on economic growth as the country’s exports struggle to keep pace with the swelling sums that Americans are again spending on imported goods.

And then it goes on to say:

But the spike does raise fresh concerns about whether some of the same factors that led to the economic crisis, including U.S. overconsumption, are beginning to reemerge. The yawning deficit may also prove frustrating for the Obama administration as it seeks to create jobs by boosting U.S. exports.

But what about choices?  Does the U.S. produce everything we consumers – and producers — want and need at prices we can afford?  Of course not.   And therein lies the confusion, as with this assertion:

At a basic level, trade deficits represent a loss of wealth for a country – money flowing abroad for goods and services produced elsewhere, supporting businesses and workers in other countries.

I would offer that the lack of imports would also “represent a loss of wealth” for consumers and producers.

Cato’s Dan Griswold points out a major oversight of the Post writer – he ignores the fact that many of those “overconsumed” imports actually provide inputs for producers to use to produce goods for export!

That view neglects the supply-side role of imports. More than half of what we import consists of goods consumed by producers-capital machinery, raw materials, parts and other intermediate inputs. Those imports help us produce more, not less. The Keynesian view also confuses cause and effect: Imports usually grow in response to RISING domestic demand. Consumers more eager to spend “swelling sums” on imports typically buy more domestically produced goods as well.

Imports, when they represent less expensive alternatives, also may put more discretionary funds in the hands of consumers to purchase other goods or services, to save, or to invest.

Maybe some Post editor noticed some of the problems with that article – a different trade article with a coauthor is on the front page of the online edition.