Trade Deficit Baloney

Donald Trump campaigned on a pledge to bring down America’s trade deficits. Yet, in spite of all his tariffs, the trade deficit is higher than when he took office. Is that a cause for concern?

Commerce is mentioned only twice in the Constitution. The word trade does not appear at all.

In Article I, Section 8, Congress is given the power “To regulate commerce with foreign nations, and among the several states, and with the Indian tribes.” This is called the “Commerce Clause.” It was designed to prevent states from creating barriers to commerce, not to give Congress the power to create them.

The other reference is in Article I, Section 9: “No Preference shall be given by any regulation of commerce or revenue to the ports of one state over those of another: nor shall vessels bound to, or from, one state, be obliged to enter, clear, or pay duties in another.” This is called the “Port Preference” clause. It was designed to prohibit Congress from channeling commerce through certain politically favored ports.

The Commerce Clause is the most abused part of the Constitution. It has been used by the federal government to increase its power over the states and their citizens and to decrease the power of the states and their citizens. It has been used to force farmers to destroy crops and pay a fine for growing “too much” wheat (Wickard v. Filburn, 1942). It has also been used to criminalize marijuana for medical use even where states have approved such use (Gonzales v. Raich, 2005).

Even though there is a Commerce Clause in the Constitution, the U.S. Department of Commerce wasn’t created until 1903 as the Department of Commerce and Labor. It was renamed the Department of Commerce in 1913 when the new Department of Labor was created.

The current mission of the Commerce Department “is to create the conditions for economic growth and opportunity.” It does that by promoting “job creation and economic growth by ensuring fair and reciprocal trade, providing the data necessary to support commerce and constitutional democracy, and fostering innovation by setting standards and conducting foundational research and development.” The Department has the “one overarching goal” of “helping the American economy grow.” It also has “five strategic goals” to advance its mission and support its overarching goal:

1. Accelerate American Leadership
2. Enhance Job Creation
3. Strengthen U.S. Economic and National Security
4. Fulfill Constitutional Requirements and Support Economic Activity
5. Deliver Customer-Centric Service Excellence

The Commerce Department’s more than 46,000 employees, “located in all 50 states, every U.S. territory, and more than 86 countries,” work in 13 bureaus and 15 offices, some of which have nothing to do with commerce, such as the National Oceanic and Atmospheric Administration (NOAA), the U.S. Census Bureau, and the National Weather Service. It’s something of a surprise that the U.S. Small Business Administration (SBA) is not under the umbrella of the Commerce Department. Total budget authority for the Commerce Department for fiscal year 2020 was $15.543 billion.

One thing the Commerce Department does every month, through the Census Bureau and the Bureau of Economic Analysis, is release the latest trade deficit numbers, with which the news media then run as if those numbers mean anything.

Last month in The Hill it was “US Trade Deficit Soars to 12-Year High” after the trade deficit for July rose by 18.9 percent to $63.6 billion. This month in the Daily Caller it is “US Trade Deficit up to $67.1 Billion in August, 14-Year High” after the trade deficit for August rose by 5.9 percent.

According to the Census Bureau and the Bureau of Economic Analysis news release,

• August exports were $171.9 billion, $3.6 billion more than July exports. August imports were $239.0 billion, $7.4 billion more than July imports.
• The August increase in the goods and services deficit reflected an increase in the goods deficit of $3.0 billion to $83.9 billion and a decrease in the services surplus of $0.7 billion to $16.8 billion.
• Year-to-date, the goods and services deficit increased $22.6 billion, or 5.7 percent, from the same period in 2019. Exports decreased $296.1 billion or 17.6 percent. Imports decreased $273.5 billion or 13.1 percent.

The August figures show surpluses, in billions, “with South and Central America ($2.4), Hong Kong ($1.7), OPEC ($1.3), Brazil ($1.0), the United Kingdom ($1.0), Saudi Arabia ($0.2), and Singapore ($0.1)”; and deficits, in billions, “with China ($26.4), the European Union ($15.7), Mexico ($12.5), Germany ($4.6), Japan ($4.3), Italy ($2.6), Taiwan ($2.6), India ($2.3), France ($2.2), South Korea ($2.2), and Canada ($1.2).” The trade deficit is on track to exceed $600 billion this year.

This is trade deficit baloney.

Over the course of this year, I have spent hundreds of dollars at Walmart, Publix, AutoZone, Texas Roadhouse, various Mexican restaurants, and local gas stations. Yet not one of those businesses has ever given me one red cent. I am running huge trade deficits with those stores, restaurants, and gas stations. I sell books, sometimes to overseas customers. But I also buy books, sometimes from overseas bookstores. In most years, I purchase many more books from foreigners than I sell to them. So again, I am running huge trade deficits, this time with overseas book dealers.

Yet I believe my life is much better off physically and intellectually by running these huge trade deficits. What American businesses or foreigners do with the money I give them is immaterial.

Unfortunately, however, it is a nearly universal consensus that the goal of U.S. trade policy should be to promote exports over imports, and that more imports and trade deficits are bad for the economy. But the goal of U.S. trade policy (assuming that there should be an official U.S. trade policy) should not be to promote exports at the expense of imports, but to maximize the economic freedom of Americans to engage in commerce in the global marketplace as they wish.

The concept of “trade deficit — bad; trade surplus — good” has two underlying economic fallacies: (1) trade results in winners and losers; and (2) trade takes place between countries.

Trade is not a zero-sum game in which one side gains at the expense of the other. In every exchange, both parties give up something they value less for something they value more. Each party to a transaction anticipates a gain from the exchange or it wouldn’t engage in commerce with the other party.

Trade almost never takes place between countries. Trade takes place between individuals, businesses, and other entities. That the two parties engaged in commerce are not located in the same country has no economic significance whatever. Trade between entities residing in two different countries should not be regarded as any different from what happens when two entities in the United States engage in commerce. Trade is really just international commerce.

That the trade deficit is a bunch of baloney was recognized by Adam Smith in The Wealth of Nations (1776):

Nothing can be more absurd than this whole doctrine of the balance of trade, upon which, not only these restraints, but almost all the other regulations of commerce are founded. When two places trade with one another, this doctrine supposes that, if the balance be even, neither of them either loses or gains; but if it leans in any degree to one side, that one of them loses and the other gains in proportion to its declension from the exact equilibrium. Both suppositions are false. A trade which is forced by means of bounties and monopolies may be and commonly is disadvantageous to the country in whose favour it is meant to be established, as I shall endeavour to show hereafter. But that trade which, without force or constraint, is naturally and regularly carried on between any two places is always advantageous, though not always equally so, to both.

It goes without saying that we don’t need a commerce department to keep track of and report the trade deficit.

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