Fisher Investments Editorial Staff
Trade, Deficits

Lopsided Trade

By, 11/19/2009

Story Highlights:

  • Concerns about the trade imbalance and US and China abound—and are overwrought.
  • The US has had a trade deficit for decades, and it hasn't held the economy back before.
  • Folks shouldn't think of trade in terms of borders—in an increasingly global world, more trade benefits all.
  • Overall, stock markets respond positively to the increased business opportunities provided by rising free trade.

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Obama's Asia tour has brought America's big trade deficit to China into the spotlight—once again. Some worry the big deficit puts the US in a weaker position, exacerbating job losses and sending precious dollars overseas, dampening US economic recovery. But America having a trade deficit is hardly new. The US has had a trade deficit for decades, as had the UK—without deleterious effects. Many don't realize the US and UK have had, over the last 30 years, approximately the same size trade deficit as a percent of GDP. (Meanwhile, the pound has been much stronger than the dollar. Hmmm. Could it be a trade deficit doesn't dictate currency strength?) By contrast, Germany and Japan are net exporters—yet having a big surplus hasn't prevented them from suffering periods of economic stagnancy. In fact, overall, the US and UK have had better growth for much of the period they've run trade deficits.

The problem here isn't who has a deficit and who has a surplus. The problem is the way people think about trade. Folks shouldn't think of trade in terms of borders.  Exchange, whether across borders or between individuals, helps capital and goods flow to where they will be most efficiently utilized. For example, we import more from China because the goods are cheaper (more bang for the buck, so to speak). This isn't necessarily a bad thing as it allows us to focus on producing domestic services like health care and education and on higher-quality goods—which folks can more easily pay for using dollars saved from the cheaper goods. Cheaper Chinese labor allows US firms to move production to an area where they can maximize profits—and those profits largely flow back to our borders. So we may end up importing more than exporting, but US GDP is far greater than Chinese GDP. To the extent free trade is allowed, it's far better than trying to make every country "balance." Interestingly, China would run a trade deficit if not for the US—showing every trade relationship is but one slice of a larger picture. Yet, no one is chiding China for its naughty ex-US trade deficit.

So don't fret the trade imbalance: The benefits of free trade are many—fostering the exchange of ideas, capital, and services, and improving standards of living, for example—and global stock markets generally respond positively to the increased business opportunities provided by rising free trade.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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