Think about all the purchases you’ve made in the last month. You probably went to the grocery store, the barber, the dry cleaners, or the gas station. And, like most transactions you’ll complete in your daily life, you probably exchanged your money for these goods and services. Many people also probably have a similar routine. Odds are though that these businesses don’t buy anything from you – but that’s just fine. Both sides benefit all the same.
Now consider international trade. Nation A purchases $700 million in cars from Nation B, $800 million in wine from Nation C and $300 million in televisions from Nation D. Meanwhile, Nation A sells its own product, soda, in large quantities to Nation E, but nothing in return to Nations B, C and D.
Economists would say that Nation A has trade deficits with Nations B, C and D, just like you do with your grocery store, your barber, your dry cleaners, and the gas station in the first example. But the total you’ve paid to those businesses is considered normal and a good thing. And though the same applies to trade balances, some argue that an international trade deficit is bad or even harmful, or that trade surpluses — like the one between Nation A and Nation E — are a good thing.
While it’s understandable to think of deficits as bad, and surpluses as good, that logic just doesn’t apply to trade.
The fact is, when nations trade with each other, it is not the governments of Nations A, B, C, D and E that are trading, but rather individuals and businesses in those nations who are trading with other individuals in different nations. In other words, when you purchase, say, kiwis that were grown in another country, you aren’t hurting your country, just as someone who purchases the products of our farmers from abroad isn’t hurting theirs.
That’s because trade is mutually beneficial — that is, all parties are benefitting from this transaction.
Trade barriers, oftentimes in the form of tariffs or taxes on goods imported from other countries, harm American consumers — most often the least fortunate of those consumers.
That’s because a tariff, designed to decrease the “trade deficit,” is just a tax on consumers. It works like this: A foreign good arrives on our shores to be sold to an American consumer. But, the government issues a tax on that good, called a tariff, which raises its price. That added cost is passed on to the consumer, who of course, must pay more for the good.
That added cost can reduce the demand for that good, making it less likely that the foreign exporter will ship the good here. The result? American consumers will be paying more for the goods they need — food, toilet paper, clothing or cars — which will also be less available to them. Put simply, consumers will have less choice in the goods they buy and will pay more for those goods.
When individuals across the world are free to trade with each other, wealth is created and freedom is promoted. At Grassroots Leadership Academy, we take a deeper dive into trade in our Insight to Action – American Trade: Treasure Island or Fantasy Island.