Are Trade Deficits a Problem or a Positive for a Country?
Executive Summary
- The following is a very different interpretation of trade deficits than is provided by mainstream economists.
- We evaluate this interpretation and provide our view.
Introduction
Normally countries try to stay away from trade deficits. An entire type of economics, called mercantilism, of which Adam Smith was a major proponent, was centered on running trade deficits in order to obtain gold from trading partners.
Warren Mosler explains the non-mainstream view of trade deficits in the following quotation.
“Imports are real benefits and exports are real costs. Trade deficits directly improve given level of government spending, not because of imports. Jobs are lost because taxes are too high. We are benefiting IMMENSELY from the trade deficit. The rest of the world has been sending us hundreds of billions of dollars’ worth of real goods and services in excess of what we send to them. They get to produce and export, and we get to import and consume. Is this an unsustainable imbalance that we need to fix? Why would we want to end it? As long as they want to send us goods and services without demanding any goods and services in return, why should we not be able to take them? There is no reason, apart from a complete misunderstanding of our monetary system by our leaders that have turned a massive real benefit into a nightmare of domestic unemployment. Same with China—they think that they are winning because they keep our stores full of their products and get nothing in return, apart from that bank statement from the Fed. And our leaders agree and think we are losing. This is madness on a grand scale.”
Source: Mosler Economics
The Problem With This Hypothesis
Mosler’s analysis is it only looks at short terms financial benefits and only focuses on the monetary system. However, there are quite a few other implications outside of Mosler’s financial analysis — which do not detract from Mosler being accurate in what he has proposed here. These are just a few of the problems with this and they are as follows.
Problem #1: Government’s Keep Roughly the Same Level as Taxation and Monetary Policy as Before the Trade
Governments do not account for large trade deficits by providing more spending power (that is, by taxing less).
Problem #2: What Happens to the Share for Labor as the Margin on Goods Increases?
The companies keep more of the margin, which increases income inequality.
Problem #3: Technology Transfer and IP Theft
In the case of the US-China trade, there has been a massive technology transfer from the US to China in a very short period of time.
Problem #4: Lower Labor Protections
Workers in low-cost countries do not have labor laws to protect them. This means that the US is “importing” unethical labor practices as we consume goods made with unacceptable labor conditions. Labor standards are pressed for because society has an incentive to make the effort, as they are subject to these labor standards. However, there has never been a popular movement around improving the labor standards for workers in OTHER countries. This is just too distant of a benefit that goes entirely to someone else. The ultimate way of eliminating labor laws is to have very high levels of trade so that the work is done in outside countries — where there is no pressure to improve living conditions from the population within the country consuming the trade. For this reason, trade becomes profitable, merely by eliminating or minimizing labor solidarity.
Problem #5: Higher Pollution
Environmental concerns decline as the lower-cost country has lower environmental standards than the more developed country. Again, this means that pollution is not only exported to low-cost countries, but pollution without appropriate controls is generated.
The Hidden Topic of Trade Driven Pollution
More pollution is caused because, in the US and China trade, there is a large amount of transportation fuel used to move the goods from China to the US. These container ships are 100% flagged in flags of convenience like Panama and conflict zones like Liberia (the ownership of shipping companies has nothing to do with where its ships are flagged). This would be the same thing as allowing all US car drivers to register their cars in Mexico to escape all environmental regulations. This doesn’t seem right when an individual does this. However, when a company does this, it is heralded as a great and smart way of reducing costs.
Completely Unregulated Emissions and Dumping
Outside of the port’s waters and particularly on the open ocean, these ships run the most filthy and lowest-cost bunker fuel. This creates enormous and unregulated emissions. As another example, cruise ships take advantage of a similar lack of regulation on the open ocean by storing their trash and even used oil while in port and close to shore, and then releasing everything when they get into the open ocean. Both the cruise ship industry only uses cleaner fuel while in port and close to the shore.
What (Both Cruise Shipping Lines) and Trade Proponents Don’t Want to be Discussed
Overall, the extra pollution caused by world trade, and particularly trade in goods that travel long distances, are ignored by trade proponents.