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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.

Cpt. Charisma 10mo ago 💬 1

I. You are only considering one side of these trades - the physical goods purchased. You failed to consider how the purchase was made. What does the American car company get from Mexican consumers? Nothing? Pesos? Bars of gold? Dollars? The car company won't be in business long if it doesn't get dollars to pay it's suppliers and employees.

II. In practice, no one is trading goods and services for goods and services. They are trading goods and services for debt-based monetary instruments. The mechanics can be very complicated, but this is where the deficit is created. There is a literal imbalance in payments in the form of debt that must be made up somehow. It is usually held in government bonds until paid. There can also be lines of credit between international banks and central banks involved. This has a direct effect on interest rates and currency exchange rates. A country that has persistently high trade deficits will see it's currency lose value.

III. Tariffs can be used to discourage trade with a partner with whom you have a trade imbalance. It is usually ineffective because it isn't possible to predict the exact effect of specific tariffs (or governments suck at it, which amounts to the same thing.) They can serve as an alternative to income taxes. For this to work, the volume of foreign trade needs to be high and the tariffs low enough not to hinder it. The U. S. government was mostly funded through tariffs before 1913. I believe this is Trumps eventual goal, but he is definitely not there yet. Maybe he can convince trade partners to lower their own tariffs with a policy of matching them. Maybe not. Maybe he's really just an idiot reality T.V. star and has no clue what he's doing.

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Mike Dilger ☑️ 10mo ago 💬 1

Just assume it's all done in US dollars. And that the amounts are the same. And every other need is supplied locally. Then you'll see that the dollars are just going round and round in circles, and there is no limit to this, and that nothing ever needs to be paid back to anybody, even though the dollars never wink out of existance and are seen as debt instruments.

I like to look at the physical economy because when people look at currencies they confuse themselves.

Cpt. Charisma 10mo ago 💬 1

But it isn't all done in dollars. How would Mexicans get dollars to buy cars? They get paid in Pesos!

If you look at the physical economy only, all you see is cars going to Mexico. What does the car company get? Wood from Canada?

Mike Dilger ☑️ 10mo ago 💬 2

But I'm constructing a thought experiment only, not telling you that the thought experiment is the real world! In my thought experiment, the Mexicans get the money from Canada.

In the real world, much of the USD that America spent on Chinese goods was passed on to Saudi Arabia to buy oil. So the trade defecit with China is much higher than the actual USD holdings of China. The key insight is that money is not spent just once. It goes around in circles. But trade defecits are measured as only between two parties. And people keep thinking the US trade defecit with China has some scary meaning. But it is a terribly inaccurate way to measure anything, and it doesn't represent a debt that America owes to China, unless China can actually present those USD to American sellers of goods, which IMHO they can only present a fraction of.

Cpt. Charisma 10mo ago 💬 1

Your thought experiment leaves out the part of the transaction where the actual deficit is created, then says it doesn't matter because you can't see it anymore. You then go on to make an argument based on that fact. Do you not see why that is a problem?

The USD is a little weird, since it is the world reserve currency. That means that yes, China can use dollars received to buy goods from other countries. That doesn't work the other way around, though. We can't send Chinese Yuan to Canada in exchange for wood. Not that it's impossible - they just don't want it. But the real problem comes when the Chinese have enough dollars to pay for everything they buy from other countries. They end up with an ever-increasing pile of dollars for which they have no use. This is the situation we are in now. A large part of the deficit has gone to treasury bonds, meaning we are literally paying interest on the deficit. The money is also used for things like the Belt and Road initiative and building a navy, that give China a strategic advantage. If China wanted to, they could just sell it all and crash the dollar. Are you starting to see why it matters yet?

Mike Dilger ☑️ 10mo ago 💬 1

I'm humble enough to say that maybe it is I that is confused, but IMHO it is you who are confused.

Defecit and surplus can be used to describe the change in a debt, or the change in a fictional account. The current account between the US and China is fictional. it is an ACCOUNT. Think of that word. Account... when you account for how your car got smashed what are you doing? You are explaining it. An account is an explanation of why something was transferred from one place to another. It is just and only that -- an explanation. Accounting is all about explaining why money or goods moved... was the money that I received income, payback of a loan, a gift, a loan? The accounting may imply obligations, like I have to pay the money back to the lender.

But in global trade, nobody has to pay anybody back. They aren't loans, they are trades.

If my grandmother buys a vase off of Ali Express, after that happens, nobody has any new obligations on any books anywhere. It is just a trade. They get the USD, grandma gets her porcelain vase.

So again IMHO there is no defecit that I must pay attention to. I can look through all of that goobley gook directly at the actual assets and obligations, the only real things.

Cpt. Charisma 10mo ago 💬 1

>If my grandmother buys a vase off of Ali Express, after that happens, nobody has any new obligations on any books anywhere. It is just a trade. They get the USD, grandma gets her porcelain vase.

This is the source of your misunderstanding. If you grandmother buys that vase, the seller *does not* receive dollars. They receive the local currency. You grandma and the seller are both satisfied, however, there are extra dollars sitting in the seller's country's banking system. The U.S. effectively owes that country the value of the dollars. What they do with those dollars effects exchange rates and interest rates.

Mike Dilger ☑️ 10mo ago

That is correct, and I used a simplification.

But if another customer of that bank buys oil from Saudi Arabia in dollars, those dollars are not used by China to get something from the US, they are used by China to get something from Saudi Arabia. And if the Saudis buy weapons from the US, those dollars come back into the US. And then they can go around and around again. And my point was simply that the trade defecit is not an obligation, but a summation. The dollars are an obligation. But the trade defecit can count the same dollars many times and so it can get out of whack with reality when you look at a single country like US trade defecit with China. But if you look at US trade defecit with everybody, that is useful.

Still I could be wrong. I'm not an economist.

freemymind 🇨🇭 10mo ago 💬 1

What you mean in actual deficit? When you buy a car for 50k US-dollars, is this an actual deficit for you? Or did you have 50k Dollars and really needed rather a car then these 50k?

I mostly buy my stuff, because I beleave its price is fair when I buy it. So it is in balance.

Cpt. Charisma 10mo ago

The actual deficit is the dollars the foreign country ends up holding (or the foreign currency that ends up in the U.S.) If we buy more stuff from China than they buy from us, they end up with extra dollars. They expect to be able to buy real things with those dollars at some point. That is the deficit. The things China expects to buy for the dollars they have earned.