Do Leaders Understand Trade Surpluses?

It is difficult to keep track of all of the recent developments in economic warfare prompted by the new Trump Administration. Much of the news coverage surrounding “tariffs” does little to point out the specific economic ramifications of Trumpian ideology, and I would argue that it is because neither journalists nor politicians have a complete understanding of international trade. There are certainly economists who do, but it would seem that either they are tired of engaging the public on the subject, or the public is tired of listening to economists. It is likely a mixture of both. Nevertheless, it is at this point unnecessary to merely repeat news articles concerning “Trump’s tariffs,” but rather wholly necessary to address some specific fallacies that seem to be the premise for much of the public debate around international trade policy. 

My interpretation of the current political element to this debate is as follows: most people think that “crucial” American manufacturing jobs have been outsourced to poorer countries because companies can pay workers extremely low wages while subjecting them to extremely poor conditions, thereby reducing their costs but also hurting American workers. Therefore, to “save” American jobs, the proposed solution is to place tariffs on imports from these countries such that corporations are forced to conduct their manufacturing in the United States. 

The only problem is that, for decades now, there has been bipartisan agreement that tariffs are overall destructive to the economy and promote distrust and hostility within the Liberal World Order. In other words, that argument by itself is too easy to debunk. Thus, beginning as early as 2016, President Trump took a new angle besides the “outsourcing to low-wage countries” argument by claiming that numerous other countries are “ripping off” the United States, which shifts the “victim” in this situation from poor Chinese workers, whom the average voter cares little about, to the United States as a whole. It is from here that one can analyze the ideology that has prevailed since 2016.

First, to briefly address the fallacy of “exploitation” of workers in poor countries as the explanation for why outsourcing occurs, it must be noted that throughout history, higher-wage countries have exported to lower-wage countries, and lower-wage countries have exported to higher wage countries. In his book Basic Economics, Dr. Thomas Sowell observes that “Britain was the world’s greatest exporter in the nineteenth century, and its wage rates were higher than those in most of the countries to which it sold goods.” This reality occurs because “higher wage rates per unit of time are not the same as higher costs per unit of output.” 

The reason that manufacturing is outsourced today while other sectors are not is because the difference between labor cost per unit of time is less than the difference in output per time, or productivity, which is almost always higher in the more prosperous country because, to put it frankly as Sowell does, “There are, after all, reasons why one country is more prosperous than another in the first place—they are more efficient at producing and delivering output.” Moreover, outsourcing manufacturing has done nothing but net increase wages and standards of living in both poor and rich countries for the vast majority of workers outside those in sectors that have been import-substituted, which could include either a manufacturing worker in the US or a subsistence farmer in China who now eats food grown in Africa that can finally be sold on the world market, which increases the standard of living for the African farmer as well.  

Now, turning to the idea of “ripping off” the United States, it can be assumed that Trump is referring to when foreign countries sell their goods at cheaper prices in the United States than they do elsewhere, thereby exacerbating America’s trade deficit. They are able to do this by subsidizing their own companies or granting them some other form of favorable privileges that make American companies uncompetitive. 

This idea is especially easy to believe in the case of China. If this assumption is true, then it has been true at all times throughout world history, and at all times throughout world history that governments have attempted to increase their trade surplus through political manipulation, it has been purely due to domestic political interests and has not produced any overall economic benefit. The United States grants the most privileges to its agricultural producers of any country in the world, especially to sugar producers. Documented by Sowell, studies on American sugar import restrictions found that while they do indeed ensure that sugar is produced in the United States, they almost certainly ensure that sugar confection into products, such as candy, does not occur in the United States do the higher costs of American sugar. 

In this case of “cheating,” as in every case, it is more detrimental to the country that cheats because, in reality, the confection industry produces three times as many jobs as the sugar industry. If it is true that foreign countries, such as China, “dump” their goods on the world market at lower prices than what they sell for in China, it would seem to be common sense that to do so is detrimental to China, so it is quite possible that in many of the situations to which Trump is referring, there is no cheating taking place at all. 

Many people understand that goods cannot sell at the same price everywhere due to differences in demand, as in how much the good is needed, but many neglect that goods cannot be sold at the same price everywhere due to differences in purchasing power. China is able to sell goods so cheaply in the American market because there are so many buyers that can afford them, such that the goods can be produced, transported, and distributed at such a scale that their average cost decreases; whereas, even in China, there are fewer buyers who can afford to purchase the goods, such that every good produced to be sold within China will have a higher average cost associated with it, and, thereby, a higher price to accommodate for the fact that the company is selling that good in place that faces fewer potential buyers compared to where it could be selling it in the United States. 

It is far less costly to conduct huge shipments of innumerable goods to the US than to distribute the same goods in smaller intermittent shipments to other countries or even within China. Therefore, the fact that foreign countries can sell their goods so cheaply within the United States should be celebrated as evidence of a superior level of prosperity. This discussion also poses the irony: why would any group of people complain about having access to cheaper goods than another group of people?

That question brings the discussion to the idea of trade deficits and surpluses, or the lack thereof. Trade deficits and surpluses are merely accounting phenomena; they do not reflect any sort of economic reality concerning economic surplus or cost. There can be no such thing as a “trade surplus” because the entire purpose of trade is equal exchange. Every export to the United States must be an equal transaction—to which of course someone could respond that the other half of the exchange is currency, or American dollars, which merely goes to China. Based on that logic, are millions of Chinese walking around with American dollars in their pocket? No. It goes to the company, which in this case can be a company producing toys. What does a Chinese company do with American dollars printed in the United States of America? It spends them in the United States. Does it spend them on producing toys? No. It spends them where they belong: the areas where they produce the greatest returns, which are those areas in which the United States possesses a comparative advantage, which is likely nothing physical at all. (When economists record trade deficits, they only include transfers of physical goods and materials. Thus, they are merely accounting numbers, and as with any number in accounting, it is irrelevant without the entire picture) 

Going further, the American dollars are likely spent on the technology produced in the United States that allows the Chinese company to produce the toys, such as Microsoft software, and so long as an American company is producing technology, and the Chinese company is producing toys, the toys will be better, cheaper, and more accessible. Now, we are down to the classical economic principles of comparative and absolute advantage—principles that have been understood since the late eighteenth century. What is a primary consequence of this system? Net increased jobs. The problem is that these new jobs are likely scattered in numerous new businesses across the country specializing in areas attracting American dollars, while in the concentrated geographic area or sector that used to produce toys, there was a decrease in jobs. That sector is most certainly more consolidated or politically organized to demand protections, but it is most certainly not a large enough majority of any country to prompt all-out economic warfare.

This discussion could continue with centuries of anecdotal and statistical examples of failed international trade policy, ranging from the Hawley-Smoot Tariffs that turned a recession into the Great Depression to tariffs on steel imports in the 1980s that saved jobs in the steel industry but cost jobs in every industry that requires steel to make its products. As I was writing this blog, I saw an Amazon advertisement in which Leonardo da Vinci was attempting to build wooden airplanes, but he lacked the materials. Naturally, he placed an order on Amazon, and it promptly arrived in Florence. He was then able to design his airplanes. It is a good thing that Florence, in this scenario, did not place protections on wooden material products, or else da Vinci may have been spending his time making very good wooden beams. 

In today’s world, those materials would have come from China, which prompts the question, do world leaders want to be making wooden beams, or do they want to be designing airplanes?