The Problem With Trade Deficits Is Not What You Think

One of the main talking points by just about every presidential candidate this year is how “bad” the trade deficit is with other countries, how it’s a sign that they are “beating us” and “laughing at us.”  These sort of statements are the economic equivalent of anti-vaccine comments; extraordinarily few economists believe trade deficits are a problem, from Paul Krugman to Don Boudreaux  and just about everyone in between.

But there’s another reason looking at just bilateral trade deficits are misleading: the world is not limited to just two trading partners.

Let’s look at a baseball comparison:

In baseball, there are often 3 (or more) team trades. Players are swapped among multiple trades. Let’s look at a hypothetical example here:

Team A trades their superstar to Team B. Team B sends a moderate player Team C. Team C then sends prospects to Team A to complete the deal.

Looking at this trade, one could make the argument that, bilaterally, each team loses. Team A sent their superstar to Team B and got nothing in return. Team B sent a moderate player to Team C and got nothing in return. Team C sent prospects to Team A and got nothing in return.

But looking at it bilaterally misses the complex essence of the trade. In reality, everyone won the trade: Team A got prospects to build upon. Team B got a superstar who could get them over the hump into the playoffs. Team C got a solid player to come off the bench and help them on a streach run (btw, here is a real example of this:http://www.cbssports.com/…/white-sox-land-todd-frazier…).

In reality, all trade is like this. I give money to my grocer. I got that money by selling my labor to my company. They got that money by selling products to clients who got their money by selling to their consumers, etc etc. One could make the argument that, bilaterally, every single actor is losing, but the reality is every single person is winning!

Looking at just a single direction of trade is too myopic.