Should We Be Afraid of a Trade Deficit?

Zhongxuan Wang, Bryn Mawr ’21

The recent trade war between the U.S. and China has ignited attention around the world as President Trump on March 22, 2018 signed a memo instructing the government to impose $60 billion in tariffs and institute tighter restrictions on acquisitions and technology transfers. The Chinese government in response unveiled plans for tariffs against $3 billion in U.S. imports. In recent years, the U.S. trade deficit has aroused many debates; the topic about China shock is one of the most discussed. Many people have a passive impression of trade deficits and associate the term “deficit” with its negative connotation, but it is important to know the word “deficit” does not necessarily mean the economy is not doing well.

A trade deficit means that the U.S. is exporting less than it is importing—spending more than it is earning. It can definitely represents a booming economy with low unemployment that may be accompanied by a growing deficit as people have more money to spend on imports. However, a continuing trade deficit may lead to less job creation, especially relatively less-productive, low-wage jobs since U.S. importers continually purchase cheaper manufacturing products from countries that have lower wages.

Some proposals state that growing imports hurt domestic industries, and thus the imposition of high tariffs is necessary. However, I’d like to introduce an economic theory called Learner Symmetry Theorem to better explain the issue to you. The Theory addresses the parallel relationship between exports and imports; a tax on imports is functionally equivalent to a tax on exports. We can see on the graph, U.S. exports and imports move at similar rates.

Screen Shot 2018-03-31 at 1.23.50 PM

Let’s try to analyze the theory so that we can understand what this graph is telling us. I think Douglas Irwin’s description of the correlation between exports and imports is really clear, “Exports are the goods a country must give up in order to acquire imports. Exports are necessary to generate the earnings to pay for income.”[1] From a foreign country’s perspective, the U.S. importing means that the foreign country is exporting. The foreign country gains revenue from exporting to the U.S., and they eventually will spend this revenue. How? By importing U.S. exports. Therefore, when the U.S. limits its imports from a foreign country, that means the foreign country is prevented from selling their goods and services to the U.S.—they will be unable to earn U.S. dollars to import U.S. goods and services and that will influence U.S. exports. The parallel movement of exports and imports in the graph clearly represents the correlation between the two. Therefore, a trade deficit is not a phenomenon that we necessarily need to be weary of, because it can imply that foreign countries are holding large amount of revenue that they want to spend, and they will spend this money on U.S. exports.

[1] Irwin, D. A. (2015). Free trade under fire. Princeton, NJ: Princeton University Press.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s