thanks Barracuda, in addition to what you wrote, here's an accounting that took economist robert w. mcgee some effort to put together.
====
Why Trade Deficits Don't Matter by Robert W. McGee*
This paper takes the position that trade deficits are irrelevant from a policy perspective and that any attempt to reduce them is counterproductive and violative of individual rights. Hardly a day goes by that the media do not mention some international trade problem such as the trade deficit.
The general tenor of the story is usually that trade deficits are bad for the U.S. national economy, with the implied or express conclusion that something should be done to reduce them. The choice of terms used to describe trade -- voluntary exchange -- makes it sound like trading with foreigners results in disaster: we are being "invaded" with foreign goods; foreign goods are "flooding" the market; foreigners are "dumping" their products. Senator Donald Reigle has been quoted as saying: "The continuing Japanese attack on our basic industries is another Pearl Harbor. The time has come to close America's door to the flood of Japanese imported products."(Ekelund and Tollison, 875)
Are Trade Deficits Bad?
"Nothing...can be more absurd than this whole doctrine of the balance of trade...When two places trade with one another, this doctrine supposes that, if the balance be even, neither of them either loses or gains; but if it leans in any degree to one side, that one of them loses, and the other gains in proportion to its declension from the exact equilibrium. Both suppositions are false...that trade which, without force or constraint, is naturally carried on between any two places, is always advantageous...to both."(Smith, Bk. IV, ch. III, part 2, para. 2)
The author decided to test this view - that trade deficits are bad - by constructing a series of examples using elementary accounting principles.
Case No. 1
Situation A: Assume that Joe Consumer needs an automobile and has $10,000 to spend. After shopping around for the best buy, he decides to purchase a Japanese model for $7,000. His second choice would have been to purchase a Chevrolet for $10,000. With the $3,000 he has left over, he decides to hire a local carpenter to make $3,000 worth of improvements on his home, something he wanted to have done for several years.
Situation B: Assume the same facts as in Situation A, except that the federal government imposes a $5,000 tariff on the importation of Japanese motor vehicles, so Joe decides to buy the Chevrolet instead. Also assume that the American and Japanese manufacturers each have a 20% gross margin, as do the carpenter and the automobile dealers. Is America better off as a result of the tariff? Who benefits and who loses? The following is an analysis of the two options:
Situation A: Joe Consumer has an automobile (his first choice) and $3,000 worth of home improvements. The carpenter makes a sale as well as the Japanese auto manufacturer and the American auto dealer who sells Joe the automobile.
American Auto Dealer (who sells Japanese cars)
Sales........................................................................$7,000
Cost of Goods Sold (80% of $7,000)........................-5,600
Gross profit..............................................................$1,400
Japanese Auto Manufacturer
Sales.........................................................................$5,600
Cost of Goods Sold (80% of $5,600).........................-4,480
Gross profit...............................................................$1,120
Carpenter
Sales.........................................................................$3,000
Cost of Goods Sold (80% of $3,000).........................-2,400
Gross profit..................................................................$600
Situation B: Joe has an automobile (his second choice) and no home improvements. The carpenter does not make a sale. The American motor vehicle manufacturer and the American dealer make a sale.
American Auto Dealer (who sells Chevrolets)
Sales.........................................................................$10,000
Cost of Goods Sold (80% of $10,000).........................-8,000
Gross profit.................................................................$2,000
American Auto Manufacturer
Sales...........................................................................$8,000
Cost of Goods Sold (80% of $8,000)...........................-6,400
Gross profit.................................................................$1,600
The next question to be answered: who is better off and who is worse off (and by how much) if Joe buys the Japanese automobile instead of the American one? Is there a net loss to the American economy if Joe buys Japanese?
Party to the transaction Better off Worse off
Joe Consumer................................................$3,000
Chevrolet dealer - U.S..............................................................................$2,000
U.S. auto dealer - Japanese autos.................$1,400
Auto manufacturer - in U.S.,.....................................................................$1,600
Auto manufacturer - in Japan.........................$1,120
Carpenter..........................................................$600
....................................................................._________......................._________
Totals..............................................................$6,120...............................$3,600
Net gain (betteroffness) = $6,120 - $3,600 = $2,520
These are only the "first round" effects. Extending this analysis to the economy's total structure of production would reveal further "betteroffness" throughout the U.S. economy. Some economists might argue that differing propensities might alter this result but the propensity and multiplier effects theories have been refuted for more than a generation and need not be discussed here (See Hazlitt, 1959, 1960; Hutt, 1963, 1979).
Joe Consumer is better off because he pays only $7,000 for a motor vehicle rather than $10,000. Also, he gets his first rather than second choice, a gain that is intangible and thus not measurable. He also gets $3,000 worth of home improvements. The carpenter benefits, too, as well as the Japanese manufacturer and dealer (who is a local American). The "losers" are the U.S. automobile manufacturer and the dealer who sells American automobiles.
The ethnocentric, protectionist (patriotic?) view is that we should not be looking at the entire transaction, but only at the American side. Are Americans better off or worse off as a result of allowing Americans to buy the car of their choice? Below is the analysis from that perspective:
Party to the transaction Better off Worse off
Joe Consumer...............................................$3,000
Auto dealer - U.S............................................................................$2,000
Auto dealer - Japanese (a local American)...$1,400
Auto manufacturer - U.S.,...............................................................$1,600
Carpenter.........................................................$600
..................................................................._________..............._________
Totals $5,000 $3,600
Net gain (betteroffness) = $5,000 - $3,600 = $1,400
Conclusion: Even if we exclude the Japanese manufacturer's gain, Americans are better off, in total, if consumers are allowed to buy the product of their choice, even if it happens to be made in Japan. And if Joe Consumer decides to buy Japanese electronics products rather than hire the services of an American carpenter, the result does not change. The American carpenter loses $600, which reduces the net gain to $800 ($1,400 - $600), but Joe gains because he gets his first choice rather than some lower choice on the hierarchical scale of preferences, and the American electronics store owner benefits by the sale as well.
There is another, less obvious factor to consider as well. What happens to the dollars that flow into the accounts of the Japanese businesses that sell their products to Americans? A number of things can happen. The Japanese can use the dollars to purchase American products (or services). They can lend the money to Americans. They can invest in American business, which creates jobs for Americans. Whatever they do with the dollars, the dollars eventually flow back into the United States, benefitting some American somewhere. The amount and timing of the benefit are impossible to measure, but a benefit does exist. American dollars cannot be used in Japan so they must eventually find their way back to the United States. Yet this basic fact is ignored by the vast majority of commentators who profess concern over the U.S. trade deficit. And it is not necessary to be able to measure the effects to know that there must be certain effects (Mises, 1978, 1981; Hoppe).
If America is better off, in total, by allowing free trade, then why do so many Americans want to restrict consumer choices?1 As the above analysis shows, some groups gain and some lose as a result of free trade. The groups who lost in the first case were American automobile manufacturers (and the United Auto Workers Union) and the dealer who sells American cars.2 But their loss was more than offset by the gains made by Joe Consumer, the carpenter and the American dealer who sells Japanese cars. Free trade is not a zero-sum game. The gains exceed the losses. The problem is that the parties who lose by free trade also have powerful lobbies in Washington, whereas Joe Consumer does not. The Public Choice School of Economics has spent a generation analyzing this phenomenon.3 The carpenter, who fails to make a sale if Joe buys an American car, does not even know Joe, and cannot possibly see that he is losing a sale. What is seen is an American automaker losing business. What is not seen is the gain Joe makes by buying a Japanese car and the gain the carpenter stands to make if Joe is allowed to buy the car of his choice.
Walter Williams points out that advocating tariffs is really just a scam on the American public (Williams, 66). Politicians can show how their trade policies benefit one political constituency, while the many other constituencies that are harmed by erecting barriers to trade do not even know that they are being harmed. Williams suggests that a more honest approach would be for the affected unions and companies to come to Washington each year for a handout rather than try to hide their subsidy in the form of trade restrictions. At least that way, the amount of the subsidy could be measured directly rather than hiding it from the taxpayers (and consumers) who must ultimately pay the price of government intervention. Congressmen who favor subsidizing the steel industry, for example, could ask their colleagues to vote for Aid to Dependent Steel Companies. Of course, if they tried this approach, many of the subsidies that are hidden at present would disappear, since they could not survive the light of day. It is difficult to justify protecting the job of a steelworker who earns $23 an hour in wages and fringe benefits when the average consumer who must subsidize this job earns only $11 an hour.
=====
there's another scenario that if you or anyone else is interested, i can post. |
