Friday, February 10, 2006

Some observations about trade deficits:

With today’s whopping trade deficit number that brought our 2005 trade deficit to over $700 billion, it’s only a matter of time for Democrats to start screaming.

How about though we make some observation about trade deficits?

First let me be clear that trade deficits don’t matter. Now I’m not talking about budget deficits, which is different than trade deficits that can become a problem. I’m talking about trade deficits, which is when a country imports more than it exports.

The interesting point about trade deficits is that there is no point in history that anyone can point too that shows where trade deficits wrecked an economy. However there are points in history that show when a country tried to slow the flow of goods into the country it hurt growth and led to a slowdown in the economy. This idea is the idea of Mercantilism, where you want to export as much as possible. One point in American history that showed stopping the importation of cheap goods was a disaster is the Great Depression. Every economist agrees that the Smoot-Hawley Tariff Act, which raised tariffs on thousands of imported goods, started and extended the depression. Interesting note is that because of today’s current trade deficit we have Senators like Chuck Schumer calling for tariffs on goods from countries like China. I guess he missed that day in school when they went over Smoot-Hawley.

If we take a moment to dig into the numbers we see some interesting correlations. Currently the countries with the biggest trade deficits are the U.S., Britain, Spain, and Greece. Now if we look at their GDP growth rates we see that they are also currently some of the fastest growing developed nations. Now if we look at the two developed countries with the largest trade surpluses, Germany and Japan, we notice two countries that are barely growing. One has to ask if trade deficits are bad and surpluses good, then why with Germany’s $200 billion trade surplus (the largest in the world) are they not the world’s economic superpower? Another interesting correlation is that in the last year Japan has seen their growth rates increase and economy start to inflate again. During this time their trade surplus has actually started to shrink.

These are just my own observations and despite the lack of historical proof that trade deficits are bad democrats will still try to play politics, like Chuck Schumer and call for ridiculous policies. I think though they should look back at their pal Bill Clinton. When Clinton came into office our trade deficit was almost zero. If we recall Bill Clinton and his team put in place a strong dollar policy that they adamantly defended throughout his administration. That strong dollar policy allowed us to import cheaper goods from overseas that started the trend toward our record deficits today. So Democrats can’t blame Bush for today’s trade deficits without also pointing too Clinton. I personally wouldn’t be blaming either one of them.

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