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President Trump has accused Germany and China of unfair trading practices over trade deficits.

What is unfair about trade deficits?

This may be economics 101, but in my naive eyes every time a trade is done it is done deliberately because both sides believe there is a profit to be made. Hence, each time American companies give money to Chinese companies in exchange for goods and thus enhance the trade deficit, this would presumably be to the advantage of both the USA and China.

You don't see Apple accusing Samsung of unfair trading practices because Apple bought Samsung screens but Samsung didn't buy Apple batteries in return.

Note that I am not asking why trade deficits are considered bad. Though I don't understand that either, my question how deliberate trade can be considered unfair stands even if trade deficits are bad as a whole for one country.

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You are correct. Trade deficits are not unfair, although it is hard to define unfair in an economic sense. No one is forced to trade and trade represents a consensual agreement.

The strongest economic argument for considering trade deficits unfair is so-called dumping, which is a form of unfair competition. That is when firms sell goods abroad at below a normal price in order to drive out the local competition in the long run. As the foreign businesses would make losses doing so, it only works if the foreign governments subsidize those firms. That is why subsidies leading to unfair competition are banned according to the World Trade Organization rules. In the case of the steel tariffs imposed by the U.S., dumping by China was used as an argument, although there was no evidence of China conducting steel dumping and China isn't even one of the main exporters of steel to the U.S.

Another reason is that a trade deficit means that foreign firms are doing better than domestic ones, thereby threatening the jobs of domestic workers. However, for this to happen consumers must be voluntarily buying those foreign products. if foreign firms offer a much better and/or cheaper product, then a trade deficit is great for consumers, but bad for domestic workers who produce those goods. In this case, trade still represents an overall net increase in welfare, but there are winners and losers. If the winners (consumers) would compensate the wokrers who lost their jobs, everything would be fine. If they do not it could be considered unfair, although it is not the foreign country being unfair in this case.

From my experience, there may also be illogical reasons that people consider trade unfair, which I discuss below.

When a country runs a trade deficit that means that it is consuming more than it produces. The country consumes at least as much as it produced and then a bit from what other countries produced too. When that happens, a country is essentially borrowing money from the rest of the world, because consuming more than you have is like spending more money than you have. That is what people mean when they say the U.S. owes a lot of money to China. In this sense many people who take out a loan with a bank to buy something think it is unfair that they have to pay it back. That could be one way in which deficits are considered unfair.

Another way in which deficits are considered unfair is by comparing a country to a business, which is wrong and leads to wrong policy. A business wants to maximize profits, so it would like to sell more goodst than it buys. The business fails otherwise. In this sense, a business seeing other business succeeding where it fails might think it is being treated unfairly. As discussed, however, a trade surplus just means that you are lending money to the rest of the world. That may be good for some time, but only if you eventually get it back, i.e. eventually run a deficit. So for a business, perpetually making profits is a good thing. For a country, a perpetual surplus forever is not welfare enhancing.

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  • $\begingroup$ Thanks for the good points. From one of your second to last paragraph I take that if any, the country that imports more good that it exports is at the advantage in the long run, which would be the US as opposed to Germany or China. This even makes it harder for me to understand why the US complain. $\endgroup$ – Bananach May 20 '18 at 9:05
  • $\begingroup$ If a country consistently has a trade deficit, what happens to offset that financially? Do financial assets continually leave the country? Is it possible for that to be neverending? $\endgroup$ – ahorn May 20 '18 at 9:10
  • $\begingroup$ @ahorn, yes. When an excess of goods is imported then financial capital is being exported. Of course, those could just be pieces if paper saying IOU. In the long run a deficit or surplus should not happen. Both should be averaged out to zero over time. $\endgroup$ – BB King May 20 '18 at 9:12
  • $\begingroup$ I'm not sure I understand what you mean with a trade deficit being equal to lending money. Am I wrong in assuming the trade goods are paid for, and thus the difference between import and export is made up by a net cashflow the other direction? $\endgroup$ – JAD May 20 '18 at 16:23
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    $\begingroup$ @JAD money (here: dollars) only has value insofar it is backed by (here: american) goods and services. I believe further questions regarding this should rather be posted as a separate question as the OP's question is about fairness and not necessarily the general nature of international trade. $\endgroup$ – BB King May 20 '18 at 16:28
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You have to understand, there are 4 parties to [most] international trades:

(1) the seller

(2) the seller's government

(3) the buyer

(4) the buyer's government

Obviously, when (1) and (3) agree to a sale, they both are interested in completing the deal, and they both [sort of] believe the deal is fair.

But when someone buys something from a U.S. company and wants to pay in euros, the seller will want to convert those euros into dollars. Now the governments have to get involved -- by converting euros into dollars, the euro is cheapened and the dollar is strengthened. Keep this up long enough and the country that imports more than it exports gets into trouble. They cannot make these conversions fast enough without their currency getting devalued.

(Edit -- buyer changed to seller above.)

There's a lot more to it but that will do for a start.

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    $\begingroup$ Why is the euro devaluation per se a problem here? The market works in this case. The Eurozone runs a trade deficit, the dollar strengthens, thereby making U.S. products relatively more expensive and euro products cheaper. This then solves the trade imbalance by reducing the sales of U.S. products and increasing the sales of Eurozone products. $\endgroup$ – BB King May 20 '18 at 17:23
  • $\begingroup$ '...wants to buy in euros, the buyer will want to convert those euros into dollars...': which is it? Also, why does the government need to get involved to exchange currencies? 'converting euros into dollars': they are exchanged, not converted, right? Finally, adding to what @BBKing said, you're just describing market processes, why would anything about these be bad or unfair? 'currency getting devalued': Why is that bad or unfair and not a healthy reaction to a natural imbalance of production and consumption? $\endgroup$ – Bananach May 20 '18 at 19:40
  • $\begingroup$ @BB King: when a currency is devalued, that's like reaching into everybody's pocket and taking a few cents for every dollar people have. Cheapening a currency will make exports cheaper, causing more units to be exported, but in effect this is subsidizing makers of goods for export at the expense of John Q. Public. Even worse, the boost to exports is temporary while the devaluation (and perhaps eventual inflation) is permanent. We've been sold on the benefits of a cheapened currency even though such a thing, in the long run, is harmful, not helpful. $\endgroup$ – Jennifer May 21 '18 at 9:24
  • $\begingroup$ @Bananach -- oops, that should be "the seller will want those euros into dollars". Fixed above. $\endgroup$ – Jennifer May 21 '18 at 9:26
  • $\begingroup$ @Jennifer unfortunately I disagree. Currency devaluations are by no means permanent and do not harm the public sector like that. Furthermore, the currrenct devaluation is not like inflation in taking cents out of people's pockets in terms of buying domestic goods. It only affects purchases of foreign goods in that sense, which you should reduce when running a trade deficit anyway. $\endgroup$ – BB King May 21 '18 at 10:24

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