Replying to Avatar Mike Dilger ☑️

On Trade Deficits and Tarriffs

PART I: Trade Balances are Worse than Useless

Let's imagine there are only three countries: the US, Canada and Mexico.

Let's further imagine that these three countries produce and consume all the goods and

services that they need locally except for three situations:

1) The US buys lumber from Canada

2) Canada buys steel from Mexico

3) Mexico buys automobiles from the US

Now, the trade balances will go like this:

US: In a trade deficit with Canada that just gets bigger and bigger.

US: In a trade surplus with Mexico that just gets bigger and bigger.

These trade balances don't mean anything. Nothing is out of whack. There is no limit

to how high they can go, and nothing ever needs to be paid back to anybody (it is not

debt).

Therefore I recommend ignoring trade balances entirely. They are a silly useless

metric that causes far too much confusion (including in Trump's mind).

PART II: Trade is win-win

In free markets, people trade with other people only of their own free will. They are

never compelled to make a specific trade. Therefore we can assume that both parties to

a trade doing so willingly actually value the received goods and services moreso than

they value the disposed of goods and services.

Therefore trade is win-win.

Therefore,.the more free trade that occurs, the richer everybody gets.

PART III: Tariffs and their purpose

Tarriffs are local import taxes you charge your own citizens in order to protect

local industries who produce the same products at a higher price. This may be

necessary for a number of different reasons:

1) Local industry is fledgling and not efficient yet, and you are giving them time to improve

2) Currency exchange rates are out of whack from purchasing-power-parity, and so you are

preventing efficient local industry from suffering the devastation of this artificial

imbalance.

Any other reason for imposing tarriffs causes a net loss since as already argued, trade

is win-win.

Trump may impose tarriffs in order to drive a hard bargain, but they are still a net loss

while they last. It is just that in Trump's case, they generally don't last long, they

were more of a threat than a long-term policy.

Since currency exchange rates change rapidly, I am of the opinion that tariffs should

change rapidly too. But they don't. Generally they are written into legislation and hard

to change quickly. IMHO government could do far better in this regard.
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772f9545... 10mo ago 💬 1

A trade deficit with China means freshly created US dollars go to China while real goods and services go to the US. The dollars eventually come back to buy real goods and services from the US. Ultimately, it is real goods and services that US people owe Chinese people after a long trade deficit. Perhaps that means selling university educations. Perhaps that means selling farmland. People seem to be pushing back on some of these sales indicating they may not have wanted to have to give goods and services later for goods and services earlier. Or maybe they're hypocrites. There does not need to be a conflict about it, as you correctly allude. But a persistent net trade deficit when considering all trade is probably not a natural phenomenon and could lead to a shock later when the inflated dollars come home.

You are right that tariffs are bad for everybody. It is strange that so many countries use them.

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Mike Dilger ☑️ 10mo ago 💬 1

Unless I'm wrong, the trade defecit is not a measure of China's holdings of US dollars. For example, they might have used the dollars to buy oil. Now the Saudis can claim real goods from America with them.

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772f9545... 10mo ago 💬 1

I don't know how they measure it exactly but in the simplest conception, if the US provides 500 dollars worth of goods and services while getting 1000 dollars of goods and services from other countries, then there are 500 dollars that may come back. So whether the Saudis use them or the Chinese use them, the money might come back to the US. Or it could be held and used abroad. There may or may not be a problem. It seems that the 500 dollars will eventually come back to the US. If the US has exported its inflation to an extreme degree, it means eventually non-US people will eventually come to own the US, right? Maybe that means better stewards take over those resources, the US deserved it. Or maybe the dollars never come home. Or maybe the proportion is such that it's never a problem. But I think there is a potential problem if people do not actually want people from Saudi Arabia and China to be their new bosses.

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Mike Dilger ☑️ 10mo ago 💬 1

This is one reason the dollar loses value. The debt shrinks in real terms, so they aren't paying full price for anything. The other reason is to light a fire under people's wallets so that they spend faster.

The US national (federal) debt is 35 trillion dollars (most of it owed to itself in weird bookkeeping). The M2 money supply is 21 trillion. The US current account (total, worldwide) is -311 billion (billion, not trillion).

Japan holds about 3% of US debt. China is second with 2.6% of US debt, which is $860 billion. $860 billion is far less than 21 trillion or 35 trillion.

And if anybody wants to get mad that foreigners have claims on the US... get mad at Japan.... although Japan is more than 200% of GDP in debt itself.