The narrative around trade deficits in society is wrong. It's something driven in by mainly left wing politics and generally viewed as a negative thing. The concept really took place in the United States where it has had a trade deficit for a long time. In Canada, we've had a trade surplus for a long time, but deficits are happening and in the future we'll most likely have them all the time.

Trade deficit and trade surplus are an oxymoron

Let's think about what the word trade means. A trade is when two individuals or groups/businesses exchange goods or services. This trade is mutually beneficial for both parties; meaning that each party trades for a more preferable outcome than their current state.

The concept of deficit and surplus with regard to trade isn't a fair measurement, especially with regard to arbitrary lines in a global marketplace. If you look within the country, most seafood is purchased on the coasts. Just because a Saskatchewan wheat farmer buys fish from B.C., and the merchant buys fishing equipment from Quebec doesn't create a deficit for Saskatchewan. All parties have engaged in beneficial exchanges.

International trade

People often get lost in this discussion when trade becomes international. There is too many moving pieces here. The measurement of trade deficit/surplus is one of manufacturing. We buy a million goods from Vietnam and they buy no goods from us. It ignores the fact that they're given money. Just the exchange itself is mutually beneficial, but Vietnam ends up with Canadian dollars. They have to do something with those dollars. It's not like they disappear. They have to trade them with another country that wants to buy/invest in Canada or they have to do that themselves.

Anti-free trade and manufacturing lobby & economics

The concept of a trade deficit really comes about through two specific forms of politics; anti-free trade and the manufacturing lobby. Free trade is valuable because of the concept of comparative advantage among nations[1]. And the manufacturing in our country view themselves as comparatively disadvantaged compared to a country like China or Vietnam. It's true in many ways. It's heavily unionized and our country's productivity is not good[2].

When one is a proponent of free trade, there is an understanding that there will be changes in the economy. It is this change that inevitably creates fear and people want to stop it for their own jobs. It's understandable, but it's ignorant. It's the equivalent of fighting the first tractor because it puts farmer laborers out of work.

Now, the other side of this is an economics movement. I'm not an expert on the history of economics, so I'm not sure whether manufacturing as a pillar of all of the economy is something that is real in the science or something that came about due to politics. But there is a view that manufacturing is all that makes up the economy. If a country isn't manufacturing, it's doomed to fail. And just so I'm not picking on the left here, there's also someone like Peter Schiff that thinks this way too.

It is true that wealth is something created (ie: made). There are laws in nature, plants that grow, rocks and boulders - but they're of no value until man does something (labor) and creates something that doesn't exist (wealth). And a key component of that is thought. One must think before they can create something.

The part to focus on is thought because that is the important part. The industrial revolution was the greatest thing to happen to humanity and it lifted so many people out of poverty, but that's just manufacturing. As globalization has grown we have experienced the comparative advantage of other countries and for the most part they can do manufacturing better than us. It's not game over, we're evolving to the intellectual revolution in the market place where we hold the comparative advantage in thought.

For example, an iPhone is a trade deficit maker since it is manufactured in China and imported to United States. This a very short sighted measurement. The iPhone is created in the United States. Many talented engineers designed all aspects of it. The body, the components, the mapping of the components and how the components work together (software) is what makes the phone possible. A plant in China making them is just the unthinking actions of workers. The creation is done in California.

Conclusion

A trade deficit (or surplus) isn't something real. It's a measurement of mere manufacturing value. We must not forget that every trade, both parties benefit. Since we don't barter and use Canadian dollars, those dollars have to eventually work themselves back to us. The proponents of trade deficit measurements are desperately clinging to manufacturing as the basis of an economy and do it at the expensive of comparative advantage. Thought is an important part of what makes wealth possible. Our economy doesn't lose, when manufacturing goes out of the country. The key component is that the economy changes and labor moves to more advantaged industries - and in a lot of cases these are the skilled thought industries.
References
  1. Comparative Advantage - Wikipedia
  2. Canadian productivity: Even worse than previously thought - The Globe and Mail

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Posted by Christopher | 11:37 AM | , , , | 0 comments »


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