With Its $23 Billion 'Surplus,' Is Nigeria Ripping the U.S. Off?
The actual win-win advantages of global trade are too often expressed in the simplistic win-lose jargon of sports or war. A country with a trade surplus is seen by many as a winner; a country with a trade deficit is too often regarded as a loser. Anyone who holds that one-dimensional outlook should examine the United States’ overall and country-by-country trade balances. They demonstrate that trade surpluses are no panacea, and trade deficits are far from calamitous.
Just ask yourself, which economy would you rather have – Nigeria’s, with its $23 billion trade surplus with the United States, or The Netherlands’, with a $24 billion trade deficit? The U.S. actually recorded its smallest trade deficit of the past 15 years in 2009 – a year when the country was in recession. It recorded its biggest trade deficit of that period in 2006, in the midst of a robust five-year economic expansion. Meanwhile, the last year the U.S. economy showed an overall trade surplus was in 1975, when the country was mired in recession.
Clearly, the test of economic success or failure is not a country’s trade balance. And the success of any bilateral trade relationship does not depend on which country records a trade surplus. Rather, success is determined by whether overall trade increases – imports as well as exports.
Quite simply, trade offers enormous advantages to both the importer and the exporter.
First, trade generates economies of scale, allowing firms to spread production costs over a wider and larger market. For example, when Apple developed the iPad it was able to spread the product’s start-up costs over a global market. If the company was producing only for an autarkic U.S. market, American consumers would have had to bear the full R&D and start-up costs, with smaller economies of scale. If every company was producing only for its own national market, production costs per unit would increase dramatically – with consumers paying in the form of much higher prices and far less choice. The iPad, like virtually all new products, was made possible at an affordable price only because of the existence of a global market – and a global market depends on trade.
Second, trade allows countries to utilize comparative advantage. This is one of the most misunderstood terms in economics, with people often confusing it with competitive or absolute advantage. In fact, comparative advantage is not something that a country does best compared to everybody else – it is something it does best compared with everything else it does. As David Ricardo explained when he developed the Theory of Comparative Advantage, if two countries capable of producing two commodities engage in the free market, each country will increase its overall consumption by exporting the good for which it has a comparative advantage while importing the good in which other countries enjoy one, based on differences in labor productivity. If the thing Spain does best is make wine, and the thing France does best is make cheese, then Spain’s comparative advantage is in making wine, regardless of whether France is better at it. The real strength of comparative advantage is that it allows countries to specialize in those industries in which they are most efficient.
Third, the wider the trade network, the greater the technological spillover. Often better dissemination of technologies benefits other countries more clearly, as they take advantage of U.S.-developed technologies. But often this benefits U.S. companies, such as when they were able to learn from many lean production techniques pioneered by Japanese manufacturers. Trade allows us all to learn from each other.
Fourth, import competition reduces the potential for monopoly power by domestic firms. This benefits both end-use consumers and intermediate producers, who are positioned to receive reduced markup margins and increased choice. For example, if the United States has only one leading widget-maker, makers of super-widgets who need widgets as an input have no choice but to pay the price and accept the conditions the virtual monopolist demands. But if global free trade opens access to 10 more widget makers world-wide, the super widget-maker is suddenly in a position to demand and receive lower costs and improved service from all of them, domestic and foreign. These advantages can then be passed on to consumers.
And that points directly at the biggest advantage of open trade: It fosters greater competition. When trade was less open than today, during the earliest rounds of post-war multilateral trade agreements, it was easy for the Big Three to dictate terms and conditions to their consumers – resulting in fewer models, fewer options, higher relative prices, and planned obsolescence. That became a thing of the past when Asian and European carmakers entered the rich U.S. domestic market. Today, states and cities fight for transplant auto factories, and American consumers enjoy far wider choice at lower relative cost.
The biggest advantage of free trade isn’t that it enhances our ability to export – it is the fact it enhances our ability to import, making goods and services more efficient and affordable through scale economies, global efficiencies, greater technological spillover, wider choice and most importantly, greater competition. If both parties to a trade agreement achieve these benefits, they both win – regardless of which country happens to import or export more.
