Trade Deficits and the Folly of Protectionism
Why is trade beneficial?
Imagine two farmers with two farms. Imagine each raises two products, beef and wheat. But imagine that one farm is much better suited than the other to raising beef while the other farm is far superior to the first for raising wheat. If the farmers trade with each other, the farm best suited for beef can be fully devoted to beef while the farm best suited for wheat can be fully devoted to raising wheat. The result will be that the total quanity of both wheat and beef will increase or if only the same quantity is needed then less land and effort will need to used to produce the same total quality as before. Clearly, trade benefits both farmers.
In a different seceario imagine that while the first farm
Why are exports important?
The earth as a whole exports precisely nothing and is none the poorer for it. Yet, it is taken as self-evident gospel that countries grow richer through exports and that every country should constantly strive to increase its exports and should strive to export more than it imports.
But why should all countries strive to export as much as possible when the earth as a whole gets along fine while exporting absolutely nothing? The answer is that trade is economically beneficial. A country only really needs to be an exporter if it wishes to import things.
How can a country import things?
Do countries import or individuals and corporations?
One way a country can “pay” to import things is by owning productive assets in foreign lands.
Any country that wishes to import anything from the rest of the world must pay for that in one of four ways: i) by sending (exporting) something of similar value back to the rest of the world in return ii) by paying with money or IOUs of some kind (such as the countries currency or bonds which payoff in the country’s currency) which the rest of the world will use at some future time to purchase something of value (in effect a delayed export) or iii) by giving the rest of the world immediate ownership of some of the country’s assets such as land and buildings in return for the imports or iv) by owning productive assets in foreign countries which
Any country running a trade surplus with the rest of the world will accumulate foreign money or foreign bonds that result in that country having a claim on the future output or assets of some portion of the rest of the world. Conversely, any country that runs a trade deficit with the rest of the world is running up a debt to the rest of the world that it must pay at some point in the future by giving up some of its production or other assets such as land and buildings to foreigners.
The same rule applies to any geographic area such as a province or a City. If the residents of any geographic area wish to import anything from outside their borders then they must pay for that in some way such as by sending out (exporting) something of equal value or by giving up some kind of claim. Either that or the area must be subsidized in some way.
The rule even applies to each of us as individuals and/or family units. In today’s economy all of us effectively “import” the vast majority of what we consume. Very few of us produce any of our own food, or cloths or transportation. We don’t provide our own medical or dental needs, we don’t build our own houses. We effectively import all of these things along with many others including vehicles, gasoline, utilities, internet services, various forms of entertainment, and even toilet paper. To pay for all of these imports most adults have paying jobs by which we effectively export the value of our services. Each adult also usually pays various taxes and most collect cash payments from the government at some point in their lives.
Geographic area can import people or get subsidised cash flow?
Over a lifetime each of us will typically strive to have enough “exports” in terms of the net after tax value of our services to pay for our lifetime of “imports” (purchases of all kinds) with hopefully a positive balance at the end so that we don’t die in debt. At some point in our lives most of us will also collect some form of government cash that that can also be used to pay for our imports.
Individuals and/or families do not have to balance their cash inflows from their “exports” and government transfers with their “import” each month or year. The credit markets allow us to run deficits in some years such as by taking on a very large debt to purchase a house and then paying that off over time. And the various savings and investment markets (including pensions) can be accumulated when cash inflows are greater than imports and the proceeds from same can ultimately fund additional imports or be left as an inheritance.
Individuals and bunesses usually operate with completely free trade withing their State or Province. We are sometimes encouraged to buy as locally as possible but I am not aware of any restriction on free trade among the people and businesses of and Province in Canada or state in the U.S.A. No tariifs apply when the reidents of one City make purchases in a different city in the same province or State. And the same generally applies to all trade within each of Canada or the USA. But there are some restrictions liquor (restrictions of professional services)
What are the economics of a City?