Don’t Demonize the Deficit

Story Highlights:

• Many folks believe the US trade gap is important.
• Increasing exports means there's still solid demand for our goods abroad; firms find wider markets, increase sales, and hopefully earn more.
• But just because exports are good doesn't necessarily mean imports are bad. From a global view, there is no such thing as a trade deficit.
• The more we engage in global commerce—viewed domestically as either imports or exports—the better off everyone will be.

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Earlier this week we noticed the re-emergence of a classic investing myth. Folks hailed the trade deficit shrinking on growing exports as good news.

Trade Gap Narrows on Surge in Exports
By Courtney Schlisserman, Bloomberg

Many believe a narrowing trade gap's a good thing. The idea is we've stanched the bleeding—worked up the gumption to say no to those evil foreign salesmen, peddling their evil foreign foods, designer handbags, and shiny cars. This belief is seemingly supported by gross domestic product (GDP), which counts imported goods against domestic production.

Does the trade balance really affect overall economic health the way many think? It's easy to grasp why more exports might be good. Increasing exports mean there's hale demand for our goods abroad; firms find wider markets, increase sales, and hopefully earn more.

But just because exports are good doesn't necessarily mean imports are bad. Imports can be symptomatic of healthy consumers and businesses demanding raw materials and finished goods within a productive global environment. Importing goods and services means we're free to access cheaper or higher quality goods from countries ideally suited to their production. Recall free trade is principally about exchanging goods and services based on mutual benefit. We can either enhance our lives with those products or add value to them and resell them on the global market.

Thinking globally, notions of trade deficits and surpluses are meaningless. One country's deficit is another's surplus and vice versa. Surpluses and deficits cancel each other, leaving us simply with global commerce. And the more we are engaged in global commerce—viewed domestically as either imports or exports—the better off everyone will be.

Most fears about trade deficits tie back to home country bias. After all, you never hear about the huge trade deficit California runs with, say, Michigan. No one seems to care about that. Even if you make the mistake of only looking domestically, it's hard to prove trade deficits are bad for economic or stock market health. Historically, countries running trade deficits aren't the worst performers. For example, take the UK and US. Both have consistently run trade deficits for years. On the other side, look at Germany and Japan. Those countries have had significant trade surpluses. The UK and US have exhibited above average economic and stock market growth, while Japan and Germany have both lagged. Where would you rather live?

We think folks should lay aside those latent pangs of guilt when devouring a box of Belgian chocolates or dancing with a broom to ABBA and know that, whether it's importing or exporting, more global commerce is a great thing.