Monday, July 07, 2008

What's so "alarming" about the trade deficit?

I'm usually skeptical of obsessions about trade deficits, which is (to be a bit simplistic) the difference between exports and imports. I think most such worries about the trade deficit comes from the old mercantalist notion which holds that "exports are good" and "imports are bad", which economists as far back as Adam Smith tried to explain, is nonsense. The only reason we export is to get imports, if everything came in for free, why on earth should we produce anything?

Given this, I was a bit surprised to read the the Sunday Times economics column titled "An alarming growth in the trade deficit". The columnist goes into detail on what type of goods lead to this deficit. Now, trade deficits are in it self not really a problem, but it could be (but not necessarily is) a symptom of a problem, depending on how the deficit is created. The U.S. (among other developed countries like Australia) has run a huge trade deficit for a very long time, doesn't seem to have affected them too much.

Now, I'm not saying SL trade deficit is not a problem, but the ST economist doesn't really make the case as to why it is and worse, why this is an 'alarming' situation. His only claim is that 'spending' on imports has increased largely due to high oil prices and the growth of industrial exports is "quite inadequate to finance the increased expenditure on imports".

I'm at odds with this argument. I don't know about you, but the likes of MAS and Brandix, doesn't exactly pay my fuel bill. In reality, countries don't really trade, people do. To pay for the increased Oil prices, I don't necessarily need to export stuff overseas, I can "export" my products/services/labor to my neighbor which doesn't really have an effect on the trade deficit. We don't fret over the trade deficit of Colombo or Kandy, why should we fret over the trade deficit of Sri Lanka unless someone there is evidence to that effect. But then again, he's the economist and I'm the student. So please, anyone, enlighten me, what exactly is so alarming about the Sri Lankan trade deficit?

Related links : Adam Smith on balance of payments, John Stossel on trade deficits, Russ Roberts on Why we Trade.


TheWhacksteR said...

How about debt? say you keep buying stuff from your neighbor but can make enough money to pay him back. on the note of the US. i heard a theory that the dollar is being purposely de-valued in order to increase the appeal of US exports. mybe to reduce its gigantic trade/current acct deficits? but i agree, generally trade deficits tend to work out on the long run. but it is still an important part of our current account is'nt it?

Deane said...

Thanks Whakster. Well, there are differing views on whether the trade deficit in the U.S. is a problem or not. But there's always talk about the specific reasons as to why this is a problem or not. Some think it's a sign of national savings and investments are low, etc.

My point is if debt is the problem then why not talk about the debt numbers instead of talking about something generic like the trade deficit?

A Student who gets a loan for higher ed. runs a huge trade deficit arguably, but if that's an invesetment he's making in his future wellbeing and six figure salary, that's hardly a problem.v If he flirts with heroin through college and fail, yes, he could be in trouble, but his loan can hardly be blamed for that predicament and looking at people with loans would be a poor indicator of bad students.