Wednesday, May 15, 2019

Fixing A Trade Deficit that Doesn't Matter

Let's take a scenario where Apple is on the verge of creating a new phone that would revolutionize the mobile industry. However, a part needed to complete the phone is very rare and necessitates a large number of resources to acquire. Apple can either choose to make a large investment and spend a large sum of money to acquire said part, or they can buy it on Amazon for 200$. Obviously, they buy it on Amazon. In this situation Apple has a trade deficit with Amazon - they have 0$ and gave away $200. But, obviously, Apple isn't operating at a loss since they've gained something they wanted (at a cheap cost) that will net them profits in the future. In this way, trade deficits don't truly matter, but some people appeal to the idea of being Amazon, or in a countries case, a large aggregate exporter of materials. If you were to ask me, I'd rather run a trade surplus, like Germany, but again, it doesn't matter. However, say you wanted to reduce the trade deficit. Like Trump, you could simply place tariffs on goods, but this only reduces the deficit if there is a lack of investment being caused by the tariff. 


If you were to frame the tariff as reducing the deficit by reducing investment it wouldn't sell as hard since we know that, in the long term, investments are the main source of not only economic growth, but the economic well-being of the overwhelming majority of a countries citizens especially those permeating the poverty line.

In the short run, how much stuff is made largely depends on demand - if stores sell all their goods they put on more workers and have people work overtime trying to get more sales. But not all businesses can do that at once for long. Eventually, workers become scarce, wages rise and businesses find it's no longer profitable to keep producing so much and the boom ends.

In the long run, the amount of stuff we can make depends on how clever we are, how good our technology is and how much capital (tools, machines, and buildings) we have. Investment (depending on how you define it) creates these things, increasing how much stuff society can make without having to work overtime. Tariffs reduce the propensity of this occurring and increase the chance of monopoly.

The government has negative savings right now, that is it's running a budget deficit. Perhaps, a better way to reduce the trade deficit is via reducing the national savings rate.  There are many ways to do this, decreasing the federal budget deficit may be one of them. Fully funding social security is another way. Basically, eliminate all disincentives to save and thus increasing America's marginal propensity to consume.

Note: It's fine to try and target certain industries and push back against China's predatory practices, but the understanding of trade, the relative randomness of tariffs, the pushback against deals like NAFTA and TPP only make China's influence stronger and show a lack of understanding of the economics behind free trade. It's fine to have a protectionist sentiment against China, but it's not fine to be protectionist.

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