“The Chinese are raping us” and “Canada is killing our farmers”! Such melodramatic claims from Trump resonate with many Americans, because the effects of globalization have been devastating for half the population. To his credit, Trump has been harping on trade deficit for thirty years – he was complaining about the Japanese in the 1980s. However, he’s vastly oversimplifying the issue and the solutions. This is an important topic that requires serious thought.
What is Trade Deficit?
Simply put, trade balance is the difference between our exports and imports. If we export more than we import, we have a trade surplus; but if we import more than we export, alas, we have a trade deficit!
Why Trade Deficit is Bad
Trade deficit is transfer of wealth.
Since our Federal Reserve Bank creates fiat money out of thin air, it’s hard to see the adverse effects of trade deficits. However, imagine for a moment that all trade happened with gold. Every year that we have a trade deficit, our gold reserves will shrink, and we can then clearly see that perpetual trade deficit is unsustainable.
Another facet of trade deficit is its impact on the money supply. Say you spend $1000 on jewelry at a local store. That’s not a one-time transaction. The jeweler may spend that money on a furniture store, whose owner uses that money to pay his employee, who uses that to pay his rent, which the landlord uses to buy groceries, and so on. Thus the economic effect of $1000 is multiple times its value.
Now imagine the catalytic effect of $9 trillion! That’s the tremendous economic stimulus we have lost in the last two decades alone due to trade deficit.
A corollary of trade deficit is that Americans are not producing the goods that we import. Of course, no country is 100% self-reliant, but everything we import potentially represents a lost American job.
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