An excess of imports over
exports is typically described as an “unfavorable balance of trade.” The
description of the balance as “unfavorable” derives from the belief that
exports are a source both of money coming into a country, in exchange for the
goods exported, and of jobs in that country in the production of the exports.
Imports, on the other hand, are viewed as taking money out of the country, in
the purchase of the imports, and transferring jobs from the domestic economy to
the foreign producers of the imports.
It is on this basis that Trump
and many others believe that China et al. are “killing us.” The implication of
this belief and its intellectual foundations is that the United States needs to
adopt a government policy of increasing exports and reducing imports by such
means as protective tariffs, import quotas, and export subsidies. (Trump has
not yet explicitly enunciated this policy, but it is logically implied in what
he does say.)
Now the truth is that in
the monetary conditions of the present-day world, an excess of imports over
exports does not at all represent a threat to the money supply of a country or
the ability of domestic spending to support employment. In the 17th
Century, when the doctrine of the balance of trade first came into vogue, the
money of the world was gold and silver. In those conditions, the only way that
a country without gold or silver mines could increase its money supply was by
means of obtaining money from abroad, in exchange for the export of goods. The
import of goods could for a time reduce the money supply of a country.
But today, money is
irredeemable paper, and every country manufactures its own money supply.
Indeed, in these conditions, an outflow of part of the money supply of a
country in exchange for imports is positively favorable. This is certainly true
in the case of the United States dollar, which to an important extent serves as
a global currency. The fact that dollars are in demand globally, but are
produced only in the United States, implies that the United States must export a
more or less substantial part of its new and additional supply of dollars. Exporting
part of the supply of dollars represents getting imports of real goods in
exchange for pieces of paper that are virtually costless to produce and replace.
At the same time, it limits the rise in prices in the United States by holding
down the increase in the supply of money in circulation in the United States. Thus,
seen in this light, an excess of imports over exports turns out actually to be highly
favorable rather than “unfavorable.”
Far more important than
the gain associated with obtaining imports by means of the export of costless
paper dollars is the gain associated with obtaining imports by means of the
investment of foreign capital. To make this point as clear as possible, think
of Saudi Arabia before it had an oil industry but after geologists had
confirmed the existence of vast oil deposits there. What was necessary to
develop those deposits was flotillas of ships from Europe and America bringing
vast imports of drilling equipment, sections of pipe, the materials and
equipment required for building oil refineries, and the consumers’ goods
required for armies of foreign workers constructing the Saudi oil industry.
Indeed, so far from being a source of unemployment in Saudi Arabia, this
allegedly unfavorable balance of trade was the foundation not only of Saudi
Arabia’s oil industry but at the same time practically all of the worthwhile jobs
that exist in Saudi Arabia, which are either in its oil industry or closely
connected to its oil industry. Thus, in fact, nothing could be more favorable
in reality than what most of today’s economists absurdly describe as an “unfavorable”
balance of trade and a cause of unemployment, namely, such an excess of imports
over exports.
Today, investment by
China and other foreign countries in the U.S. is what enables the American
economy to import more than it exports. As in the case of Saudi Arabia, this
investment and accompanying excess of imports over exports makes it possible
for the United States to have more and better equipped factories and all other
types of means of production than would otherwise be the case, and thus to have
a larger number of well-paying jobs. Indirectly, even the purchase of U.S.
government securities by China et al. has this effect. Foreign purchases of
U.S. government securities hold down the diversion of capital funds from U.S.
firms into the purchase of government securities. The government securities
that foreign investors buy are government securities that U.S. investors do not
have to buy, which enables them to have more funds available for the purchase
of capital goods and labor in the U.S. To this extent, its effect is the
prevention of the drain of capital funds from the purchase of capital goods and
labor by business into the financing of government spending.
In addition, foreign investment
in U.S. government securities serves to prevent the Federal Reserve from
creating still more new and additional money with which to purchase those
securities, something which would represent a substantial increase in inflation
in the U.S.
American job losses are not the result of freer trade
and an excess of imports over exports, but of government policies that prevent
capital accumulation in the United States, among them policies that limit
imports. An essential part of any economic policy that would truly help to
“make America great again” is to avoid preventing imports.
____________________________
Copyright © 2016. All rights reserved. For permission to reprint, please contact the author at georgereisman@georgereisman.com.
George Reisman, Ph.D., is Pepperdine University Professor Emeritus of Economics, a member of the FEE Faculty Network, and the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996; Kindle Edition, 2012), The Government Against the Economy, and numerous essays and articles. See his Amazon.com author’s page at http://www.amazon.com/-/e/B001KCWY0Q. His website is www.capitalism.net. His blog is www.georgereismansblog.blogspot.com. Follow him on Twitter at GGReisman.
