An Open Letter to All Reporters, Editors, Columnists, Substackers, and Bloggers
Media Folk:
You of all people should recognize the power of language. Words not only have dictionary definitions, they often convey emotions and carry meaning beyond their formal definitions. So this humble economist has a modest plea: Please stop referring to trade deficits and trade surpluses as “unbalanced trade.”
I was prompted to issue this plea by reading in the Wall Street Journal that “Trump has so far targeted nations with persistent trade imbalances with the U.S.” Readers of this line, if they are unfamiliar with economics, can be forgiven for concluding that Trump’s actions are justified. But that conclusion would be mistaken.
To be “unbalanced” is bad. An “unbalanced” thing, if it remains unbalanced, will inevitably topple over and shatter. Something that is “unbalanced” demands correction, and perhaps even emergency intervention.
Yet none of this is true about so-called “unbalanced trade.”
All trade is voluntary. Each party believes that what he or she gets is worth at least what he or she gives. Each party to every trade believes himself or herself to be made better off by the trade. (And who better to make such an assessment than the individuals actually doing the trading with their own property?) Each trade is balanced because each person’s act of giving is fully compensated by that person’s act of getting.
So how can it be that if each individual American leaves each trade satisfied that what he or she gave to non-Americans is balanced by what he or she got from non-Americans – how can it be that if each trade that an American has with a non-American is balanced – Americans as a group wind up having trade that’s “unbalanced”? The simple yet correct answer is that it cannot be so.
What is called “unbalanced trade” is an accounting artifact the conventional name of which is utterly inaccurate and, because of this inaccuracy, inappropriately frightening. The economically uninformed hear and read (from you!) about America’s “unbalanced trade” or “U.S. trade deficits,” and the illusion is created that something is amiss with U.S. foreign trade.
But this illusion is false.
Every cent of the so-called “U.S. trade deficit” with the world is matched by a cent of foreign investment in dollar-denominated assets. No imbalance.
And as for so-called “U.S. trade deficits” with another country, this concept is especially illegitimate. It’s possible for a country to have no trade deficit with the rest of the world – or even to have a trade surplus with the rest of the world – and yet have “trade deficits” with several, or even most, individual countries. More fundamentally, the notion that there’s a trade “imbalance” when the people of one country buy more from the people of another country makes no more sense than the notion that there’s a trade imbalance when you buy more from your supermarket than your supermarket buys from you. When you walk out of your supermarket, you possess physical goods that are worth to you what the money you paid for those goods was worth to you. What you get balances out what you gave. No imbalance.
So please, please stop using inaccurate and misleading terms that portray U.S. trade deficits as “imbalances.”
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
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