“Trade Deficits” Are Our Rewards for Going to Work Each Day
In fact, international transactions are always in balance, by definition.
—Robert L. Bartley, The Seven Fat Years
The late British writer Geoffrey Bocca had a diverse body of work that included a biography of Winston Churchill, a book on hedonistic living in Europe called Bikini Beach: The Wicked Riviera, and even one about a modern U.S. tragedy, The Assassination of J. F. K.
Bocca also spent time in Moscow in the decades before communism’s collapse. The result was a fascinating book about his experiences in Soviet Russia titled The Moscow Scene. If you want a keen sense of the drudgery and poverty that define societies almost totally bereft of markets, property rights, and trade, Bocca’s book is a good place to start.
His description of a trip to a restaurant in The Moscow Scene is particularly telling:
I had scarcely sat down when a young blond thug in the black suit and clip-on bow tie of a maître d’hotel swooped and handed me a greasy menu, the pages almost disintegrating from use. I knew the menu by heart. It has not been changed in a quarter of a century at least. What I had in mind to begin with was borscht. But the headwaiter, who was pushing caviar tonight, took the menu out of my hands and turned to the caviar page.1
And thus began an argument between customer and waiter that would shock most anyone used to restaurants in societies defined by markets. Bocca wanted borscht, but the surly waiter kept demanding that he order caviar. After conferring with a colleague and questioning whether to serve Bocca at all, the waiter instructed him to order Chicken Kiev despite Bocca’s desire for beef fillet as his entrée. Bocca described his waiter’s bearing as that of a reform school graduate, which he might well have been, since waiting tables was about the lowest form of employment in that dystopian society.2
Bocca never got the meal he asked for, but the description of his visit speaks volumes about the wonders of trade. Indeed, at the table next to him was an attractive couple. They had brought two windshield wipers into the restaurant with them, curiously enough. The wipers were a powerful status symbol in Moscow. They indicated that you had a car, and wipers left on a car were prime targets for thieves.3
In capitalist and even in mixed economies, people produce in order to consume. But in the USSR, to the extent that a Soviet worker produced anything of value, there was nothing to buy in return for his production. The Soviets had small “trade surpluses,” which economists celebrate, but no “trade deficits,” which economists decry. They did not have trade deficits because there was nothing to buy. The shelves at state-run stores were nearly bare.
In the 1970s, Americans faced long gas lines created by federal controls on petroleum prices, but life here was paradise compared with life in the Soviet Union, where there were lines for everything. As Hedrick Smith put it in his eye-opening 1976 book about life in the Soviet Union, The Russians, “Imagine [the lines for gas] across the board, all the time, and you realize that Soviet shopping is like a year-round Christmas rush.”4
Americans wore jeans in the ’70s for a rugged, somewhat faux-impoverished look. In the Soviet Union jeans were a sign of wealth, selling on the black market for $106 a pair (a lot of money back then).5 The satirist P. J. O’Rourke suggests that horrifically tailored “Bulgarian blue jeans” did more to end the Cold War than anything else.
The funny thing is, Russians were great savers. Smith was privy to estimates that savings rose from ninety-one billion rubles in 1975 to 165 billion by 1981.6 But without functioning markets, there was no redistribution from savers to entrepreneurs. Russians couldn’t do anything with their savings, so there was no reward for discipline and prudence. The most they could hope for was a chance to go shopping abroad.
The British diplomat Nigel Bloomfield explained to Smith that Russians, outside their own bleak country, “were like coiled springs, leaping at the department store cornucopias of the West.” Rather than touring, “Russians came back incredibly laden with new dresses, slacks, shoes, shirts, radios, the whole kit.”7 Soviets clamored for trips abroad not just to breathe relatively freely, but also to shop. They could sell the goods they brought home at large markups to less privileged Soviet citizens long on rubles but with nowhere to spend them.
For a brilliant dramatization of the plight of Soviet consumers you need look no further than Robin Williams’s 1984 film Moscow on the Hudson, about a Russian musician who defects to the United States at Bloomingdale’s in Manhattan. Early in the movie he walks through a grocery store lined with shelves stocked with all manner of goods. Used to the empty store shelves that were the rule in the Soviet Union, the visitor is so confused that he faints.
The Wall Street Journal’s Mary Anastasia O’Grady has described a similar situation in Latin America. Writing about the need for a Central American Free Trade agreement in 2005, she offered an insight about imports that frequently eludes credentialed economists who focus on the harm of foreign goods’ reaching U.S. shores. Imports are good, O’Grady insisted, and free trade agreements meant to include Central American countries would help “Centrals gain access to imports.”8 Thinking back to various Russian examples, “imports,” whether from the city down the road or the country on the other side of the world, are the purpose of work. People produce so that they can consume.
But there aren’t many goods for the relatively impoverished citizens of Central America to buy in exchange for their labor. They remedy this with help from relatives lucky enough to live in the United States, who bring American abundance with them on their trips back home. As O’Grady described flights to Central America:
Forget about “carry-on” luggage on flights to Tegucigalpa, San Pedro Sula, or Managua. On these routes it’s “haul-on” baggage. Passengers, big and small, drag overstuffed grips and twine-tied bundles the size of refrigerators down the airplane aisle. Strangers come together to collectively hoist grandma’s loot into overhead compartments, with much grunting and sweating.9
The citizens of Hong Kong, by contrast, suffer none of this deprivation. Founded as a British colony in 1842 after the Treaty of Nanking, Hong Kong was called a “barren rock” because of its almost complete lack of natural mineral resources (oil, copper, tin, etc.) and farmable land. Despite its lack of “natural wealth,” Hong Kong is one of the richest places in the world thanks to its wildly ambitious people.10
Hong Kong is completely dependent on imports for its oil, food, and appliances. Yet it thrives precisely because its inhabitants import these things from other countries. In Hong Kong’s almost totally free market, nearly every product in the world can reach consumers tax-free. Americans traveling abroad roam the aisles of “duty free” stores at airports in order to buy things tax-free. The whole island of Hong Kong is “duty free,” and its extraordinarily productive inhabitants exchange the fruits of their labor for the world’s abundance.
A rich society of productive people with infinite wants, Hong Kong has a massive “trade deficit.” Economists decry “trade deficits,” yet Hong Kong is a monument to their wonders. What explains this apparent riddle? First, countries do not trade. Individuals do. A country’s economy is just a collection of individuals. The United States has the biggest economy on earth and runs a massive annual “trade deficit,” but then the “United States” does not trade. The individuals who live in the United States trade. They enjoy one of the highest average incomes in the world and are consequently voracious consumers.
Economics is about the individual. If we take the idea of “trade deficits” down to the individual level, we can see that what sounds economically destabilizing is really beneficial. In my case, I run trade “surpluses” with my various employers—Forbes, RealClearMarkets, and Toreador Research & Trading. They buy more from me (my labor) than I do from them. But I then take that “surplus” (my salary) and spend it on housing, clothes, and food. I run a trade deficit with my landlord, my clothier, and my grocery store. Do I worry that in my commercial relations with my grocery store, I do all the buying and the store does all the selling? Of course not. My trade deficit is actually my reward for producing. Some people like to save their surpluses, but as we’ve seen, no act of saving ever subtracts from overall consumption. Saving merely shifts consumptive powers to others through bank deposits that are lent out, or savings go to businesses eager to grow through loans from those same banks, or for that matter, money market accounts, brokerage accounts, etc. Either way, surpluses and deficits balance.
Let’s take this analysis up a level from the individual. New York City is easily one of our richest cities. It’s the home of more billionaires than any other city on earth. As Ken Auletta wrote long ago, “For those with talent, this city is the final test.”11 And New York City runs large trade “deficits” because its citizens need to “import” much of what they consume, from all over the United States and the world. Once upon a time, the city was filled with factories, but the manufacturers departed long ago. Today those factories are luxurious lofts and restaurants for wealthy New Yorkers.
Silicon Valley rivals New York when it comes to billionaires, and trade deficits too. Although people buy products from Apple, Intel, and Oracle, the factories that manufacture those products are in foreign countries. Despite this apparent lack of production, the denizens of Silicon Valley, like their counterparts in New York and Hong Kong, do not go without. Why is this? Newspaper headlines regularly feature scary articles bemoaning trade deficits, yet rich people run massive trade deficits. What’s the explanation? The answer to this seeming riddle is quite simple.
Importing shoes from Italy, televisions from Japan, and bananas from Guatemala is called “trade,” but selling stock in American companies to foreigners is called “foreign investment.” This explains the worthless accounting abstraction that is the trade “deficit.” There is really no such thing. To simplify—we can buy those shoes, televisions, and bananas from overseas because a massive amount of foreign investment flows into the United States every day to buy shares in our innovative companies. We export shares in our world-leading companies, and in return for those shares we import things that the rest of the world produces. The trade balances.
This explains the beauty of free trade. The Silicon Valley technologist does not have to worry about designing suits, nor does the financier in New York or Hong Kong. They leave that work to the Savile Row tailor in London, and their ability to “outsource” the design of their suits means they can maximize their time spent on designing software. Moreover, the New York and Hong Kong financiers can spend their time on finding the financing necessary to bring the software designer’s vision to the marketplace.
Investment follows talent, so it’s no surprise that rich places run trade “deficits.” But a “deficit” in trade is a sign that investors put a high value on the work being done in Silicon Valley, New York, and Hong Kong. They can “import” a lot precisely because they “export” shares of the companies they own or work for.
A little common sense is in order when we’re talking about trade. The streets of New York are home to shops and boutiques selling the most famous brands in the world, but the store windows are boarded up in downtown Detroit. Producers of goods and services do not ship their products to New York because it is impoverished but because it is not.
As Robert Bartley put it in The Seven Fat Years, “The mystery is why we even collect these figures [about trade deficits]; if we kept similar statistics for Manhattan Island, Park Avenue could lay awake at night worrying about its trade deficit.”12 Exactly. Nashville residents do not pay any mind to their trade “balance” with Seattle, and their trade “balance” with Shanghai is no more important. All trade balances. Trade “deficits” with producers from near and far away are the reward for everyone’s productivity.