What causes trade deficits?
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May is “World Trade Month,” so it’s a good moment to pause and reflect on the fundamentals of international trade and its importance to American jobs and economic growth.
The facts are straightforward: more than 41 million American jobs depend on trade and exports support about half of all U.S. manufacturing jobs. In fact, one in three acres on American farms is planted for export.
But beyond these statistics lies something simpler: to trade is human. Since civilization first emerged thousands of years ago, people have seen the advantages of specialization in areas such as farming, pottery, weaving, or metalworking. By dedicating all our working hours to a specific trade, we get better at it. And we exchange what we make for what we didn’t make. Trade is simply a voluntary transaction in the marketplace, leaving both parties better off. The fact is “people gain from trade, or else they wouldn’t do it,” as David Henderson writes on the Fraser Institute blog.
Today, most of us produce very little that we consume directly. Trade is essential because a steelworker wouldn’t want to be paid in steel any more than an insurance salesman would want to be paid in insurance: you can’t eat I-beams or annuities.
But something astonishing has happened along the way. The web of domestic and international trade today allows us to devise products of such marvelous complexity that no single person knows how to produce them.
What’s more, we mostly never meet our collaborators in the creation of medical scanners, smartphones, or even the lowly pencil. As economist Donald Boudreaux recently wrote in the Pittsburgh Tribune-Review:
Consider just some of the goods and services that were unavailable to ordinary Americans 30 years ago: individual-serve coffee-makers (“Keurigs”), high-definition televisions, downloadable and streaming music, movies and TV shows, Lasik surgery, Viagra, smartphones, GPS navigation, laptop computers, the Internet. Each of these items was attention-grabbing when first introduced. But they all became so widespread so quickly that they are today part of our landscape.
Our ancestors would find many of these products indistinguishable from magic, but the way we make them is even more astounding. In fact, the supporting cast in their production includes people who may have no idea their labor is contributing to these final products. They may be only remotely aware of their existence.
In America, as elsewhere, our trade debates tend to focus on the importance of boosting exports. The U.S. Chamber of Commerce of course represents manufacturers, service providers, and agricultural businesses—men and women whose companies produce goods and services. So we make no apologies for seeking policies to make it easier for them to make and sell their wares — domestically or as exports to foreign customers.
But today, success as an exporter very often depends on imports. Nearly half of all U.S. imports are raw materials and intermediate goods used by American manufacturers. In many cases, these are inputs not available from domestic sources or available only in limited quantities at higher prices. Without those imports, costs would rise for U.S. manufacturers, who would then find it harder to compete in global markets.
In the exchange of trade, exports are our payment, and imports are the benefit we obtain in return. We tend to export the things we make most efficiently. For the United States, that includes planes, trains, and automobiles; pork, soybeans, and almonds; and financial, transportation, and cloud computing services.
In exchange, we import industrial supplies such as crude oil; consumer goods such as apparel that tend to be produced with low-skilled labor; and a wide variety of capital goods.
We also tend to import many things we produce efficiently and even export in substantial quantities. Far from being redundant, this enhances consumer choice and competition in the marketplace, which in turn impels all businesses to make better products at lower prices.
Sadly, a small number of people in the world’s poorest countries still live without trade. These are subsistence farmers, the world’s poorest people, who with few exceptions consume only what they produce: for example, a family growing corn on a hillside in Central America or rice on a small plot of land in India. Occasionally modernity prompts an iron age or even a space age intervention —a steel plow or vaccination against polio. But their destitution is extreme and should never be romanticized.
Trade is no panacea. Like all competition in the marketplace, it serves over time to bring prosperity to many and bankruptcy to some. Those who are hurt should be helped, and U.S. government programs have done a very poor job in this regard.
But governments that go to extremes to bar the disruption brought about through trade, technological change, and competition in the marketplace—say, for example through communism—have left all their citizens poorer.
The exchange of trade is free, voluntary, and it isn’t directed from above. This is why, as House Ways and Means Committee Chairman Kevin Brady has said, “protecting our individual freedom to trade as Americans—to buy, sell, and compete anywhere in the world with as little government interference as possible”— is so important. We at the U.S. Chamber couldn’t agree more.