Monday, May 30, 2005

I buy more from my grocer than he buys from me, and I bet it’s the same with you and your grocer. That means we have a trade deficit with our grocers. Does our perpetual grocer trade deficit portend doom? If we heeded some pundits and politicians who are talking about our national trade deficit, we might think so. But do we have a trade deficit in the first place? Let’s look at it.

Insofar as the grocer example, there are two accounts I hold. One is my “goods” account, consisting of groceries. The other is my “capital” account, or money. Let’s look at what happens when I purchase groceries.

Say I purchase $100 worth of groceries. The value of my goods account rises by $100. That rise is matched by an equal $100 decline in my capital account. Adding a plus $100 to a minus $100 yields a perfect trade balance. That transaction, from my grocer’s point of view, results in his goods account falling by $100, but when he accepts my cash, his capital account rises by $100, again a trade balance.

The principle here differs not one iota if my grocer was located in another country as opposed to down the street. There would still be a trade balance when both the goods account and the capital account are considered.

Imbalances in goods accounts are all over the place: My grocer buys more from his wholesaler than his wholesaler buys from him. The wholesaler buys more from the manufacturer than the manufacturer buys from him, but when capital accounts is put into the mix, in each case trade is balanced.

International trade operates under the identical principle. When we as consumers purchase goods from China, and the Chinese don’t purchase a like amount of goods from us, a trade deficit is said to exist. But instead of purchasing goods, the Chinese might purchase corporate stocks, bonds or U.S. Treasury debt instruments. Just as in my grocer example, there is a balance of trade. The deficit in our nation’s goods and services account, sometimes called current account, is matched by a surplus of equal magnitude in our capital account.

A large portion of surpluses in our capital account consists of U.S. Treasury debt instruments held by foreigners. As of June 2004, China held nearly $200 billion, Japan more than $1 trillion, and Europe combined held more than $2 trillion.

Some politicians gripe about all the U.S. debt held by foreigners. Only a politician can have that kind of audacity. Guess who’s creating the debt instruments foreigners hold? If you said it’s our profligate Congress, go to the head of the class. If foreigners didn’t purchase so much of our debt, we would be worse off with higher inflation and interest rates.

What about foreigners possibly dumping our debt? Foreigners aren’t stupid. Dumping large amounts of Treasury bonds would depress their value. Foreigners and we would both take a hit.

That foreigners are willing to exchange massive amounts of goods in exchange for slips of paper in the forms of currency, stocks and bonds should be a source of pride. It means America, with its wealth, rule of law and the sanctity of contracts, inspires foreigners to hold large amounts of their wealth in U.S. obligations.

That willingness means something else: Trade increases competition. Ultimately it’s competition, many producers competing for his dollar, that truly protects the consumer.

What protects producers, at the expense of consumers, are restrictions on competition. The quest to restrict competition is at the heart of trade deficit demagoguery. When did you last hear a consumer complain about buying more from a Chinese or Japanese producer than the producer buys from him?

Walter E. Williams is a nationally syndicated columnist.

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