Monday, May 15, 2017

Trade Deficits Don’t Matter – Unless Government Borrowing is Involved

Richard Ebeling emails:

Dear Bob,

I have a new article on the website of the Future of Freedom Foundation on, "Trade Deficits Don’t Matter – Unless Caused by Government."

In 2016, the United States ran a trade deficit of $502.3 billion. Listening the Trump Administration, you would have the impression that America's economic status in the world is threatened due to importing more goods than we exported last year.

The fallacies surrounding balance of trade deficits become clear if we begin where economic understanding should begin -- with individual buyers and sellers in the market. In the social system of division of labor, we "export" our specialized good or service as the means of earning the financial wherewithal to "import" all the goods produced by others we are unable to supply to ourselves.

Invariably, we run balance of trade "surpluses" with those to whom we sell more of our specialized good or service than we buy of their particular products. And we run balance of trade "deficits" with those from whom we buy more of their goods and services than they buy any of our specialized product. Each participant gains from these trading opportunities, caring little about who buys more or less from one compared to another.

Some of us save part of our income rather than spend all that we've earned by exporting our product on the market, thus, running an overall balance of trade surplus by earning more on goods sold than we spend on goods bought. But we then use that savings to directly or indirectly invest in either our own country or other lands. And some times it is we who run an overall balance of trade deficit, using others' saving to help fund our investment projects or other types of expenditures, with promises to pay back the borrowed funds out of our future income and profits.

What applies to each of us as individuals, applies to the citizens of a country as a whole when their personal "trade" balances are added together for estimating a nation's trade balance with other countries around the world.

All of these free market choices and trades are mutually beneficial and benign. It only becomes a problem for the people of a country, as a whole, when it is government that is doing the borrowing to fund its domestic expenditures. Mortgaging its citizen's future income in the form of taxes to pay back principle and interest to foreign lenders. Unrestrained from the market-based checks and balances in which individuals normally work, spend, save and invest, the government can create a fiscal crisis that threatens the economic well being and future of the entire country.



  1. I actually feel like the title concedes too much.

    Government borrowing is always bad, regardless of trade deficits, which are nothing but a red herring.

  2. Mr. Smiley,
    Yes, a strong case can be made that government deficit spending always has negative effects for the society. And I have written about this:

    But this recent article was focused on the specific fallacies surrounding the notion of "balance of trade deficits," and it was in that context that I wrote about how government borrowing can create trade deficit problems that would not be case with the buying and selling, loaning and borrowing among private individuals in the international marketplace.

    Thank you for our thoughtful comment.