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Introduction:
In December 2019, the US trade account balance stood at a deficit of $48.9
billion, against a deficit of $43.7 billion in November and $60.8 billion in
December 2018. Most commentators consider the trade account balance the single
most important piece of information about the health of the economy. According
to the widely accepted view, a surplus on the trade account is considered a
positive development while a deficit is perceived negatively. What is the
reason for this?
Popular thinking holds that the key to economic growth is demand for goods and
services. Increases and decreases in demand are behind the rises and declines
in the economy’s production of goods. Hence, in order to keep the economy
going, economic policies must pay close attention to the overall demand. Now,
part of the demand for domestic products emanates from overseas. The
accommodation of this type of demand is labeled exports. Likewise, local
residents exercise their demand for goods and services produced overseas in the
form of imports. It is held that while an increase in exports strengthens the
demand for domestic output, an increase in imports weakens the demand. Exports,
according to this way of thinking, are a factor that contributes to economic
growth while imports detract from the growth of the economy. Thus whenever
imports exceed exports, a trade deficit emerges, and this is bad news for
economic activity as depicted by the gross domestic product—GDP. The
deficit is viewed as a symptom of bad economic health. It is then assumed that
what is required is a boost in exports and a curtailing of imports in order to
reduce the deficit. This, it is held, will lead to improved economic health.
The popular view maintains that it is the role of the government and the
central bank to introduce a suitable mix of policies that will guide the
economy on the path toward a “favorable” trade account balance.
However, does it all make sense?
Trade Account Balance in a Market Economy:
In a market economy, each individual sells goods and services for money and
uses money to buy desired goods and services. The goods and services sold by an
individual could be termed their exports, while the goods and services bought
could be termed imports. The record of such monetary exchanges for any period
could be labeled the trade account balance. In a free market economy,
individuals’ decisions regarding the selling and buying of goods and
services (i.e., their exports and imports) are made voluntarily, otherwise the
acts would not be undertaken. The emergence of an exchange between individuals
implies that they expect to benefit. Whenever an individual plans to import
more than he exports, the shortfall will be balanced either by running down
existing savings or by borrowing. The creditor who supplies the required funds
does so because he expects to profit from that. The current practice of lumping
individuals’ trade account balances into a national trade account balance
is of little relevance to businesses. What possible interest can a business
have in the national trade account balance? Will it assist him, in the conduct
of his business? Since there is no such thing as the "USA, Ltd." that
can be bought or sold in the market, the national trade account balance will be
of no use to businesses. Although the national trade account balance is of
little economic significance and is a sterile concept, individual or company
trade account balances are real things that carry economic significance. For
instance, the trade account statement of a particular company could be of use
to various investors in that company. Again, this is not the case with the
national trade account balance.
The Government Is a Greater Danger Than Any Trade Balance :
the national trade account balance is a harmless definition, the
government’s reaction to it can produce harmful effects. Government
policies that are aimed at attaining a more “favorable” trade account
balance by means of monetary and fiscal policies disrupt the harmony of the
marketplace. This disruption leads to a shift of scarce resources away from the
production of the most desired (by consumers) goods and services, towards the
production of less desirable goods and services. Furthermore, it is not the US
that exports wheat, but a particular farmer or a group of farmers. They are
engaged in the export of wheat, because they expect to profit from it.
Similarly, it is not the US that imports Japanese electrical appliances, but an
individual from the US or a group of Americans. They import these appliances,
because they believe that a profit can be made. If the national trade account
balance is an important indicator of economic health, as various commentators
imply, one is tempted to suggest that it would be a sensible idea to monitor
the trade account balances of cities or regions. After all, if we could detect
economic malaise in a particular city or a region, the treatment of the
national malaise could be made much easier. Imagine, then, if the economists in
New York were to discover that their city has a massive trade account deficit
with Chicago. Does this mean that the New York authorities should step in to
enforce the reduction of the deficit by banning imports from Chicago? No
individual or group of individuals can suffer as a result of an
“unfavorable” trade account balance. But suffering can emerge from a
drop in the incomes of individuals because of government tampering with the
economy.
The fallacy of the national trade account balance also extends to the national
foreign debt. If an American lends money to an Australian, the entire
transaction is their own private affair and is not of concern to anyone else.
Both the American and the Australian are expecting to benefit from this
transaction. Lumping individuals’ foreign debt into the total national
foreign debt is thus another questionable practice. What is this total supposed
to mean? Who owns this debt? What about all those individuals who do not have
foreign debt? Should they also be responsible for the national foreign debt?
The only situation in which individuals should be concerned with foreign debt
is when the government incurs it. The government is not wealth generating and
as such derives its livelihood from the private sector. Consequently, any
foreign government debt incurred means that the private sector will have to
foot the bill sometime in the future.
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