Comment by rayiner
4 days ago
Why is there a trade deficit with a country if there aren’t trade barriers or other unfairness, such as China’s weaker labor laws and environmental laws? Mathematically, “free trade” treats those things as a “comparative advantage” but we don’t have to pretend that reflects reality.
The formula simply reflects the premise that, in a fair system, trade deficits would average out to zero. It also escalates the tariffs as the trade deficit goes up, and reduces them as the other country imports more of our goods. It’s an elegant formula.
Because it's not a barter economy and you would not naturally have equal dollar quantities of goods to buy from and sell to each trading partner individually.
One country may be on the other side of the world, far poorer and mostly exporting say minerals or basic textile goods where their cheap labor gives them an advantage. What goods/services are they going to buy from the US that they cannot get from more local trading partners cheaper? They can import grains more cheaply from nearby neighbors. Southeast Asia is not going to start buying Teslas & Fods, they are driving around in Suzukis and whatever China makes.
You spend $5/week at your baker, does your baker buy $5/week of software from you?
> One country may be on the other side of the world, far poorer and mostly exporting say minerals or basic textile goods where their cheap labor gives them an advantage.
But it’s insane that “cheap labor” is considered a “comparative advantage.” Free trade punishes Americans for their high standards of living, forcing American labor to compete with cheap foreign labor. The whole point of these tariffs is to take that out of the equation.
Do you think the US has an infinite supply of labor?
Do you think that people will choose easier high paying jobs over harder lower paying jobs?
If you give the reasonable answers to those questions, who do you think is replacing the $3/hour production that we import?
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Don't worry, tariffs will reduce that comparative advantage by lowering Americans' standard of living.
So you would support criminal proceedings against American farmers/constructions companies/meat packers for using undocumented immigrant labor and punishing Americans for their high standards of living? If we are going to cause all this pain, funny ZERO policy has been about going after these groups of law violators.
Free trade allows Americans to live a higher standard of living. All the goods we buy from foreign countries are cheaper which lets us spend our money on additional things.
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How is it insane? Migrant labor has had a centuries-long stranglehold on the American economy. This is neither a new phenomenon nor a moral crisis.
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> The formula simply reflects the premise that, in a fair system, trade deficits would average out to zero.
I don't see why you would expect that.
Consider a rich country that mostly exports expensive manufactured technological things. It imports one of the natural resources it needs for this from some poor country that is mostly poor farmers and the poor laborers who extract that natural resource they export.
Its hard to see a way for the rich country to not have a trade deficit with the poor county. Even with what the poor country makes from exporting their natural resources they are unlikely to be able to afford the items the rich country makes.
Or consider two countries that are both rich and have about the same population but have different tastes. Say in country X 90% of the population likes big SUVs and trucks and only 10% like small cars. In country Y it is 90% who like small cars and only 10% like the big ones.
A car maker that has factories in both countries could find it more efficient to have an SUV/truck factory in X that makes the trucks for both countries and a small car factory in Y that makes the small cars for both countries than to have both an SUV/truck and a car factory in each country.
But since the big SUVs and trucks cost more than the small cars Y is going to have a trade deficit in cars with X.
Okay, that's a nice econ textbook hypo that explains the trade deficit with Bangladesh. But why do we have huge structural deficits with the EU, Japan, China, etc? Those are big, diversified economies. You'd think those factors would average out.
Germany is a big, rich economy. How do they manage to run large trade surpluses? They seem to do this quite deliberately. So why is it a bad idea to try and make our economy more like Germany’s? Japan has a large trade surplus. The EU as a whole is basically evenly balanced, tending towards a small surplus. Are our Reaganite overlords smarter than the guys who run those countries?
Cars is a big part of it with Japan. I'd expect that even if all other things were equal Japanese consumers would prefer Japanese cars for the same reason a lot of American consumers prefer Japanese cars: companies like Toyota and Honda are really really good at cars.
I've got way more confidence that I can buy a newly released revision of a Honda and get a car that won't be a lemon and that I can keep running well for 20+ years if I wish with reasonable maintenance than I do for American car companies.
It's not an American worker vs Japanese worker thing. 70% of Hondas and 100% of Acuras sold in the US are built domestically and for the models that are made in both countries there is no significant difference in quality.
The American companies have been improving, to the point that when I decide to replace my nearly 20 year old (and still running great) Honda CR-V the Chevy Equinox EV will be a contender. The new Chevy Bolt will probably be a contender too, especially if they get it out before the federal tax credits go away. 10 years ago this would have not been the case.
Another part of it is the dollar is stronger than the yen. Japan has been accused of trying to keep the yen low but even if they are and they stopped it still will probably be weaker than the dollar.
The strong dollar isn't just a factor in trade with Japan. The dollar being the global reserve currency makes that a factor with nearly everyone else.
For agriculture and food products a lot of countries have stricter health and safety regulations. If an American company needs to put in extra work to make their exported products meet those standards that can make them more expensive and cut demand. The foreign food companies on the other hand are already making their products to meet their stricter domestic standard so it is no extra work to meet US standards.
Is Japan's trade deficit with Australia a good or bad thing? Is Australia ripping off Japan?
The trade deficit is a good thing for Japan because Japan lacks the natural resources it needs as inputs into its industry. It happens to buy those resources from Australia due to comparative advantage.
If Japanese policymakers tried to create a trade surplus with Australia via tariffs, they would make Japan significantly poorer and weaker.
The premise of the formula is flawed. There is nothing inherently unfair about a trade deficit between two countries. There's not necessarily anything nefarious going on if the United States doesn't buy the same amount of goods from Botswana as they might purchase from the United States within any particular year.
But why should there be a structural, long-term deficit between big diversified economies like the U.S. versus EU?
I mean, if me and my neighbour both print currency on our home laser printers and buy goods from each other, am I being taken advantage of when I end up with more goods and he ends up with more paper?
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Why would free trade eliminate trade deficits? The United States is incredibly wealthy and its citizens and companies can buy more than poorer countries. Not to mention all the other factors that exist in global trade. The belief that trade deficits are bad baffles me.
With Canada, there's a deficit because they are willing to do things like send oil in exchange for promises, and then they use the promises to do things like buy capital that is located in America.
I guess you can decide that's unfair.
Because America has the "exorbitant privilege" of being a global reserve currency:
https://en.wikipedia.org/wiki/Exorbitant_privilege (it's a Wikipedia page about monetary policy).
There's nothing about fairness in trade and trade deficits/surplus. Trade is a competition after all. Free trade was what gave the German States an enormous boost and the Zollverein was a key element towards unification even though that was not the intention[0].
Have I missed the news cycle where Trump complained about the CCP committing genocide on the Tibetans and Uyghurs? How they force them into slave labor. Btw, the reading through the Wikipedia article on Penal labor in the United States make me wonder whether where the USA stands...
[0] https://en.wikipedia.org/wiki/Zollverein [1] https://en.wikipedia.org/wiki/Penal_labor_in_the_United_Stat...