Remember the Economic Basics in the Midst of Trade Turbulence

U.S. agricultural trade is being threatened by a storm of policy challenges and political rhetoric. As the political discussions continue, it’s important to not lose sight of the basic economic principles that are the foundation for all trade.

Trade between two economic agents adds value to both and is the basis for nearly all economic growth. These gains from trade are the result of specialization where market participants capitalize on their comparative advantage in some activity. Comparative advantage allows all parties in a market to produce at their lowest opportunity cost thereby using scarce resources most efficiently. For example, it might be possible for me to build my own computer in the absence of trading with the Dell Corporation. However, it is clearly more efficient for me to trade with Dell by buying my computer and using my time to do things I’m better at than building computers. Moreover, having the computer will enhance my productivity in other activities. This specialization that drives gains from trade applies to individuals, businesses, states and countries. Specialization has been a major force of economic growth since the days of hunting and gathering when hunters specialized in hunting and gatherers specialized in gathering.

International trade is fundamentally no different than any other trade in terms of the underlying economic forces. However, the complication of multiple governments and lots of politics often puts international trade under a different lens. One of the concerns is trade deficits that sometimes result from international trade. The term trade deficit is usually applied to the negative balance of goods that occurs when a country imports more products from another country than it exports to that country. To call this negative balance of trade a “deficit” is really a misnomer as it does not imply any unpaid obligation, in contrast to, say, a budget deficit. When a negative balance of trade occurs for goods there is a corresponding surplus of currency flowing out of the country. In other words, when the U.S. is a net importer of goods there is a simultaneous export of dollars in equal value.

Trade deficits are not necessarily inherently a bad thing. I have a trade deficit with Dell Corporation in that I buy computers from them and they buy nothing from me. As part of a larger economic picture, there is no inherent problem with the fact that I have trade deficits with most of the firms where I buy things. In another example, the state of Oklahoma has a trade deficit with California and Florida with respect to the majority of fruits and vegetables consumed in the state. Oklahoma does not have a comparative advantage in fruit and vegetable production and it would not be efficient to produce them all in the state. However, the state’s trade deficit regarding fruits and vegetables is part of a bigger economic picture and not a source of concern. In general, the same is true for country to country trade deficits…it is part of a larger picture involving the entire macro-economy of the country and the broader global trade picture. For example, goods sourced cheaper in another country free up resources and consumer dollars in the U.S. to support other businesses.

With all of that said, the politics of countries may include policies that distort markets and create artificial trade outcomes. This requires political discussions between countries to resolve. As we work through the escalating trade tensions that are currently roiling markets, it will be beneficial if all sides remember that trade adds value and is not a zero sum game.