If Trade 'Deficits' Are Bad, Why Do Rich Countries Have Them?
Not for nothing is the OECD known as “the rich man’s club.” It includes the developed countries and many leading developing ones. It is a club virtually every country would love to join. One fact about the OECD will surprise mercantilists who see trade as a win-lose game: The majority of OECD countries – otherwise known as the rich countries – recorded trade deficits last year. Trade deficits do not indicate a sick economy – they are also incurred by healthy ones. We import because we can afford to, and because it benefits us.
When you look at the trade balances of countries in the rich man’s club, notching export surpluses does not seem to be the sure way for countries to get rich. Of the OECD’s 35 member countries, only a minority, 16, recorded a surplus in its trade in goods in 2016. A majority, 19, recorded a deficit. Of the OECD member countries that did record a trade surplus, only 12 – about one third of total membership – notched a surplus of more than 5 percent. In total, the member countries of the OECD exported about $9 trillion in goods last year. But they imported more – $9.5 trillion – evidence, if any is needed, rebutting the mercantilist notion that exporting equals “winning” and importing equals “losing.”
Many envy the prosperity of countries like Germany, China and South Korea that carry positive trade balances. Why then ignore the prosperity of countries like the United Kingdom, Canada, and France as well as the United States – prosperous countries that carry negative trade balances? In fact, the countries that import more than they export include four of the member countries of the G7 – a rich man’s club if there ever was one. There is no “poor man’s club.” If there were, it might well include Russia, Kazakhstan, Mongolia and Chad – all of which recorded trade surpluses last year. Meanwhile, dynamic economies like Australia, Belgium, and Luxembourg – as well as most of the G7 – all recorded trade deficits. To which club would you rather belong?
OECD data also undermines the notion that trade is a zero-sum game in which it is necessary to reduce imports in order to boost exports. Reduced imports do not correlate with increased exports. Quite the opposite: When exports increase, imports do too. When imports decline, so do exports. Comparing trade figures between 2015 and 2016, one finds that the volume of exports and imports marched together, up or down, in lockstep for 29 of the 35 OECD countries.
Mercantilists claim that we need to turn imports into exports, thinking that the sum of global trade must be zero – one country’s gain being another’s loss. Why then do the two activities increase or decrease in unison for more than 80 percent of OECD member countries? Because trade is not a zero sum game. Sellers and buyers both benefit from a transaction. Countries that trade more, export and import more. Wealthier countries contain wealthier consumers. Because they can afford to buy more, they import more. Rather than indicate a declining economy, imports indicate a robust one.
Export and import volume march forward or backward together for another reason as well: Imports are a necessary ingredient of an efficient economy, and therefore essential to a country’s ability to export. Companies requiring inputs toward a finished product need to get the best price, quality, and service levels they can to compete. They need the widest potential network of potential suppliers. Being able to import – and therefore obtain the best possible terms and conditions from both domestic and foreign suppliers – is crucial to being able to efficiently make products for export. People identify an export surplus as synonymous with economic wellbeing because politicians sell free trade that way. In fact, a country’s economic wellbeing stems from trading in both directions.
The advantage of trade is not that it allows us to export more; it is that it allows us to export and import more – enhancing competition, specialization, economies of scale and knowledge transfers. In fact, the opportunity to import does even more to achieve these goals than the opportunity to export, because it widens choice. The statistics for OECD countries demonstrate that the benefits of trade do not flow exclusively to countries based solely on how much they export. They flow to countries that open their markets.