Tuesday, January 5, 2010

On Trade "Deficits" and Protectionism

Carpe Diem has a post today that makes an important economic point:

Nations Don't Trade With Each Other: Individuals Do

[T]he United States did NOT import $2.74 billion of steel pipe from China, at least not as a "country." It was dozens, if not hundreds, of American-owned companies that voluntarily placed hundreds, if not thousands, of individual purchase orders in 2008 to purchase Chinese steel from dozens, if not hundreds, of steel-producing companies in China who filled the orders totaling $2.72 billion, and shipped the steel...


It might be a subtle point, but it's important to realize that countries don't trade with each other as countries - rather it's individual consumers and individual companies that are doing the buying and selling...

It's possible that some of the confusion about international trade can be traced to confusion about the "trade deficit" and the "budget deficit." The relevant unit of analysis for the budget deficit is indeed the country, since it's the entire country via elected officials that is responsible for the "budget deficit." By conflating these two distinctly different deficits, it's then easy to assume that the relevant unit of analysis for both is the "country" when in fact that only applies to the "budget deficit" and not the "trade deficit."

Read the whole post.


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2 comments:

Rational Education said...

Beth,
I agree that the post makes the crucial distinction to understanding between a country's budget deficits and trade explicit.

However I was reading another post of Perry's and read the following:"our nation's economic future and increasing energy independence" - I am wondering why he is not consistently apllying the principle he espoused in the previous post.
Jasmine

Beth said...

Jasmine,

Thank you for pointing out this contradiction in Perry's posts. Obviously, I can't speak for him as to why he has this contradiction. It is hard to find people who are consistent through and through.
Beth