Forbes and IBD on Free Trade

They don’t address fair trade, which is something I want to get to down the road, but the general point they make that trade deficits are NOT (repeat, NOT) bad in and of themselves needs to be hit hard, especially because the new Congress’s protectionist tendencies are stronger.

First, from Steve Forbes in the Jan. 29 issue (requires subscription):

Anti-free-trade sentiment is being fueled by our record trade deficits. Congress is full of destructive proposals, including one to punish China for “manipulating” its currency. But don’t put too much of the blame on headline-grabbing politicos or xenophobic-minded protectionists. A big part of the blame belongs to the economics profession. While most economists know well the virtues of free trade, they are still tied to the notion that trade deficits or surpluses matter. A surplus is equated to a country’s turning a profit and a deficit to a nation’s running at a loss. But nations don’t trade with each other; individuals and entities do.

FORBES has had a deficit with its paper supplier for more than 89 years. Yet this “imbalance” persists because each side thinks the transaction is beneficial ….. Yet the red ink continues because the parties find it advantageous for it to continue.

In other words, trade numbers are simply one number among many. In and of themselves they tell you nothing about an economy’s health or ill health. It’s like looking at one item on a P&L statement and ignoring everything else. Yet politicos, economists and observers still prattle about America’s “growing overseas lia-bilities.” Hey, folks, unless you’re talking about Treasurys, those liabilities belong to particular companies or individuals. Period.

Many in Congress, the Treasury Department and business believe we should have “reciprocal trade” with other countries. That is, no deficit or surplus. That’s like saying that a business should have reciprocal relations with every one of its accounts. For instance, if Forbes buys paper from a supplier, then that supplier should pay an equivalent amount for subscriptions from us. It’s preposterous, but an all too seductive and destructive notion.

While preaching free trade, the economics profession helps undermine it with this zero-sum mentality focusing on the so-called balance of trade. Remember, this year marks the 400th anniversary of the settlement in Jamestown, Va. Since that time, America has run trade deficits for all but some 50-odd years. Just look at what all that economic sinning has done.

Now to an excerpt from an Investors Business Daily editorial, carried in the “Other Comments Section” of that same issue of Forbes (requires subscription):

The trade deficit isn’t bad for the U.S. economy; it’s actually good for it–and for the rest of the world, too. What most people don’t understand is trade in goods and services is driven by investment flows. When foreigners invest massive amounts in the U.S., we have to run a trade deficit because of the way our global accounts are kept. This is what’s happening now. Investors survey the world and find it full of stagnant economies, ever-menacing terror and growing threats to free markets and trade. The U.S., by contrast, is a safe, transparent, low-inflation haven that provides a slam-dunk return on their money. What’s not to like?

….. If China sells $1 billion in, say, tennis shoes to Wal-Mart and uses the money to buy an off-the-shelf microchip factory for Shanghai, that counts as an “export” and we all applaud. But if it takes that $1 billion and invests in a chip plant here–providing jobs for dozens or hundreds of software engineers, managers and salespeople, it’s counted as an “import.” ….. Yet, those are “imports” we need more of–the kind that make us richer and more productive and which boost the value of our nation’s productive assets. We should seek more, not less.

The trade deficit has crept down a bit in the past few months. That is not automatically good or bad news. To the extent it means that the country’s economic engine might be slowing down in generating the additional spending power that drives purchases of everything, including imports (I don’t think it does, but it might), it would not be good.

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UPDATE: Apparently trade is a popular topic these days — Townhall has good columns by John Stossel and Walter Williams.