Decoupling Myths Expose Trade Deficit Myths

With world markets seemingly moving in lockstep amidst continued economic uncertainty, conventional thinkers who’ve embraced the notion of “economic decoupling” are changing their tune in acknowledgement of Robert Mundell’s maxim that “the only closed economy is the world economy.” Contrary to zero-sum thinking which says the economic success of other countries poses a threat to American well-being, buckling stock markets around the world signal a happier reality that our success is theirs, and theirs ours.

The above also contradicts quite a bit of mainstream opinion when it comes to inter-country trade. Rather than an irrelevant number given the certainty that all trade eventually balances, conventional thinking tells us persistent trade deficits stateside signal prosperity for our trading partners, and impending doom for the U.S. economy.

To the trade-deficit worriers in our midst, the individual freedom we’re all afforded to purchase what we want while ignoring country origin foretells a dark future owing to our propensity to buy things not produced within these borders. The infinite individual decisions that constitute total U.S. consumption have for centuries put our trade balance in deficit, and according to various “wise” thinkers, we as a nation will eventually pay dearly for having always exercised this basic freedom.

What’s never been explained is how we as a nation continue to grow and prosper despite consuming in ways that are supposedly inimical to our economic health. Better yet, no one has told us how U.S. equity markets have gone skyward over the past twenty-five years despite an explosion in those allegedly awful deficits. With trade-deficit scaremongers embodying the old saying that “tomorrow is the day that will never come,” those not in thrall to mercantilist dogma are left to believe investors are so obtuse as to continue to bid up shares in a country whose economy is supposedly headed for a crack-up.

So why exactly is it that trade deficits have never mattered to investors, and why is it that they never will? The answer is a simple one, and the ugly gyrations of world equity markets over the past few weeks have provided it. Rather than a “decoupled” group of countries more and more dependent on economic activity within country borders, we’re very much a “coupled” collection of countries whereby the activities of the worldwide labor force are increasingly integrated. As such, economic malaise in one link of the integrated chain holds repercussions for everyone else.

When it comes to trade, just as we would never bother to consider the trade deficit San Francisco has with Detroit, in the same way we should pay no mind to any “deficits” of trade held with Shanghai. The goods we import from the rest of the world are the reward we get for being so productive ourselves.

Thanks to an integrated worldwide labor force, we as individual Americans purchase goods with no regard to country origin so that we can achieve our own comparative advantage. Simply put, we outsource to others the manufacture of our shoes, socks and televisions so that we have more time to build the Googles, Microsofts and Amazons that make our economy the envy of our trading partners. The trade ultimately balances in that we buy from the rest of the world what’s not in our economic interest to produce, and we pay for our consumption through the export of shares in our even more productive endeavors.

Despite this wealth-enhancing trade arrangement, economists and journalists continue to cheer when less in the way of “foreign” goods reach our shores. Any excitement is misguided. If not for others making for us what we don’t need to make, the finite amount of human capital we have within these borders would have to spend more time engaging in the kind of activity that markets value less.

Returning to present market uncertainty, the economic challenges we face thanks to less than optimal monetary policy are challenges an increasingly integrated world economy faces. If we’re suffering here, our trading partners feel it. And if economic problems overseas harm their ability to produce for us, we’ll feel it too in the form of lower productivity.

In his otherwise unremarkable autobiography, The Age of Turbulence, Alan Greenspan noted that the world’s "current account balance is zero." World stock markets apparently agree. The trade deficits countries run with each don't matter at all considering our integrated whole, but when one country is sick, the illness spreads.