Bilateral Trade Deficits

Here’s a key point about trade. A bilateral trade deficit is NEVER by itself a policy issue. Consider a microeconomic parallel. I have a severe bilateral trade deficit with my barber. I’m a content provider for websites and my barber doesn’t even HAVE a website. He has no need for my services at all. But I regularly need my hair cut. So the trade between us is one way. I pay him cash, he provides a service to me.

Is this alarming? No. Why not? First, because I do need the hair cuts and my barber does a good job of providing them. Second, because the price he charges is fair. If it weren’t fair, there would be other barbers in the world to whom I could turn. Third, because trying to cut my own hair would be an unproductive waste of my time — time better spent preparing content for websites.

Likewise, there is nothing alarming if the US sells little to the People's Republic of China, and China sells a lot of stuff to us. In that case, China is the barber.

Now, if I have a trade deficit against the whole world, there is some reason for concern. It means I am getting services done for me for which I can’t pay on the basis of any productive activity of my own. A serious problem. But (1) this doesn’t justify railing about any bilateral relationship and (2) surely the best available solution to that problem lies in improving my own productivity, raising the amount of money I get from the rest of the world by exporting to it. Not reducing or resenting the imports and trying to cut my own hair!

This is simple stuff. But Trump has no clue of any of it. And that is potentially disastrous.

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