Foreign Trade and the Trade Deficit

(Topics: The Economy | Back to Home)

We absolutely have to trade with other countries. We're all on this ship together. And there are three essential questions when we buy things from/sell things across international boundaries:

  1. Are they doing business and running their country in a way we approve?
  2. How does buying from them affect our businesses and people at home?
  3. Do we have a good mix of buying and selling?

These are the three key issues with foreign trade, and they are not easy to answer. Today, we have a complex system of agreements with other countries. We have thousands of pages of tariffs. We have (and have had/almost had) many treaties with acronyms you've heard of: NAFTA, USMCA, CAFTA, TPP, and so on. We conduct commerce and engage in economic relations with every country on earth. Because even the countries we don't officially trade with, such as North Korea, still send and receive goods, funds, and services to the United States through intermediary countries.

Long term, we want this system to be less complicated. That is the goal of the so-called “free trade” movement: to reduce friction in the global economy to everyone's benefit. And in fact if we look at how trade happens at a smaller scale, it is in fact freer. Trade inside a city, inside a state, or across state lines is not subject to the kinds of regulations and politics that is necessary on an international scale.

Back to the questions:

The Character of Nations

Countries are filled with people, and those people are led by (or sometimes more controlled by) their government. But what kind of countries are they? Compassionate or brutal? Generous or stingy? Cooperative or isolated?

As Americans, we have developed a culture that promotes freedom and opportunity, while maintaining reasonable order and still finding a way to take care of people who are struggling. That's what we're looking for when it comes to trade with other countries. Freedom, opportunity, law and order, and human dignity.

Where these are not enshrined, our desire to trade is diminished. Because if your people aren't allowed to start businesses, aren't allowed to speak their mind, if there is widespread corruption and graft, or if the state of human rights is unacceptable—the United States will question our trading relationship.

It's hard to imagine any other policy. The adage here is to do business with those we “know, like, and trust.” Because if we buy from those we don't really know, sell to those who we dislike, and trade with those we do not trust—we only encourage them not to change.

Because that's what trade is: it's the economic carrot to nudge countries to become more democratic and free.

The Impact at Home

Trade with other countries also impacts trade here. If your company makes widgets but another company also makes widgets, there is competition. The problem is that if the other company is in another country, that may not be fair competition. They might be able to pay their workers less and undercut you on price. But more broadly what we think of an “economy” is about people doing things roughly the same way [1].

The solution we use today is tariffs. To protect the American paper clip industry, there is a 127% tax on paper clips made overseas [2]. There's a tax on rubber bands too, mostly of which helps exactly one company in Arkansas [3]. But it's not as if this necessarily works, for lots of reasons.

First, there are ways around the laws. This is called tariff engineering. Is an action figure a “toy” or a “doll?” It's important, because one is taxed at 12% and the other at 6.8%. What about a Santa suit? Is it a “clothing” or a “festive article?” Also, if something is pre-assembled and then you remove part of it once it arrives in the country, you might be able to save money [4].

Second, big companies can still use other economic techniques to solve the problem. You can buy your local competitor and then shut them down. Or you can sell your products at a loss and then when the local competitor goes out of business, you can slowly raise your prices.

The Harmonized Tariff Schedule (HTS) [5] is the document that the U.S. Government maintains that describes all of these things. It's absolutely huge. It runs over 4,000 pages long. And yes, we employ lots of people to maintain it, to enforce the rules, and to settle disputes.

Foreign trade has big impacts here at home.

Trade Goes Both Ways

The only way we're going to continue to grow our own economy is by trading with other economies. And that means selling to them, as well as buying from them. This is in fact the opposite of what has traditionally happened in the world. Rich countries buying things from poor countries does end up transferring some wealth, but it doesn't lead to diverse economies with international competition. You've seen this on a small scale in your own community, where there is a “rich” part of town and a “poor” part of town, which often becomes more pronounced over time.

That's what's happened with offshoring. The United States used to be a manufacturing powerhouse but it quickly became cheaper to have the work be done in other (poorer) countries. While that helped the overall American economy grow, it was and is for workers and communities that depended on that sector. We need to make some things here and sell them here and overseas, and we need to buy some things from overseas as well. We need trade to both ways.

That being said, it's okay if the overall balance of trade is negative. That is, if we buy a little more than we sell, it's fine to have a trade deficit [6] as long as we are competing in every sector. As an example, we do both sell oil to other countries and buy oil from other countries. This keeps us engaged in the economy and encourages innovation and growth everywhere.

This should be our goal: to have a healthy balance of trade.


[1] Consider the website Etsy, which launched in 2005 as a platform for handmade crafts to be sold direct to consumers. If you were a knitter, a woodworker, a printmaker, or some other artisan who made small items, you now had another option besides the local art show or farmers market. But within a few years, manufacturers began to quietly sneak into to Etsy, ruined the platform for many. This is an example of “foreign trade” with the foreigners as businesses “outside” the realm of traditional Etsy sellers.

[2] Plus an additional 25% tariff on all overseas steel, added by the Trump administration.


[4] Ford motor company did exactly this. They imported Ford Transit vans from Spain as complete passenger vehicles with rear seats and rear windows so they only paid a 2.5% tax. Once they arrived in America, workers at Ford would remove the seats and replace the windows with metal panels and sell them as cargo vans—which would normally have a 25% import tax.



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