Lately there’s been a lot of noise about trade deficits, but not everyone understands what they are. Here’s a simple illustration. Let’s say you buy food at a nearby supermarket. You probably don’t sell much to them, unless you’re a food producer. You pay more money to the supermarket than it pays to you. You have a trade deficit with the supermarket!

Now you might be asking, “But why is that a problem?” It isn’t. A trade deficit as such isn’t a problem. The United States, as an aggregate, buys more stuff from Japan than Japan buys from us. That means we have a trade deficit with Japan. It also means that we have a lot of goods from there. We buy them because they’re unique or because they’re better or cheaper than the alternatives. Without that option, we’d be paying more or getting things that we didn’t like quite as much.

Protectionists tell us this is a bad thing. Why? Well, people in Japan are getting jobs to make these things instead of people in the United States. They claim this means buying from Japan puts Americans out of work. That’s nonsense for several reasons.

 

First, imports aren’t just consumer goods. They include raw materials and parts. Without them, American companies wouldn’t be able to produce as much, so they couldn’t hire as many people. Or else they’d have to pay more for materials, leaving them with less to pay workers.

Second, we don’t work for the sake of working. Our ancestors worked twelve hours or more a day to earn an adequate living. When the cost of goods goes down, we can work shorter hours, we’re less likely to need second jobs, and we can retire earlier. That’s a good thing, not a bad one.

Why politicians hate trade deficits

When politicians rail against trade deficits, they’re appealing to special interests. Trump wants huge tariffs on steel and aluminum. They’ll make cars, appliances, tools, and many other things more expensive. A tariff is simply a sales tax on imports.

But the bigger reason politicians hate imports is that they’re harder to tax. When goods are made here, the company that makes them gets taxed. Its employees get taxed. Its delivery vehicles get taxed. Its stockholders get taxed. When we buy goods from another country, some other government gets all those taxes. We’re still paying those taxes indirectly; they’re part of the price of the good. But our government wants to get its chunk on top of all the other taxes, so it charges a tariff.

Massachusetts shoppers come to New Hampshire stores because they’d rather not pay a sales tax. They’re still helping to pay the property taxes and the federal taxes of the stores and their employees. But Massachusetts politicians don’t like missing out. Massachusetts has a “trade deficit,” at least on the level of retail goods, with New Hampshire. If they could, the legislators in Boston would slap a tariff on anything their people bought here and brought home. They’d claim they were saving the Commonwealth from the awful trade deficit and helping to create jobs.

Tariffs hurt people

Politicians claim that slapping taxes on imports makes us better off. This is plain nonsense. The Smoot-Hawley Tariff of 1930 was a significant factor in making the Great Depression worse. Economists argue about how big an effect it had, but all agree that it was clearly harmful. It hurt exporters, since foreign buyers had fewer dollars to spend. It made it harder for foreign borrowers to repay their debts in US dollars.

High tariffs can help special interests at the expense of the rest of us. Trump was quick to tell the steel industry in Pennsylvania how much better off they’ll be with a tariff on foreign steel. Indeed they will be, since they can charge manufacturers much higher prices. In the end, we’ll pay those prices, or else the companies paying them will lay workers off.

When a country raises its tariffs, other governments are inclined to raise their tariffs on its exports. This may not make much economic sense, but it seems like a justified tit for tat, or else a way to get the first country to drop its tariffs. People in both countries lose. The governments and the special interests they’re protecting win.

There’s nothing inherently good or bad in a trade deficit or surplus with another country. Trade makes all of us better off, whether we’re buying things or getting paid. The bogeyman of “trade deficits” is just a way for politicians to make us think they’re doing us a favor when they tax us.