Center for Business and Economic Research - Ball State University


CBER Data Center
Projects and PublicationsEconomic IndicatorsWeekly CommentaryCommunity Asset InventoryManufacturing Scorecard

About

Commentaries are published weekly and distributed through the Indianapolis Business Journal and many other print and online publications. Disclaimer

RSS Feed

Disclaimer

The views expressed in these commentaries do not reflect those of Ball State University or the Center for Business and Economic Research.

Recent

Two Key Economic Lessons in One BillHoosiers face trade-offs and opportunity costs in the wake of SEA1.

Time to Fix Economic Development PolicyAllocating tax dollars to land development won’t cause economic growth.

The Unanticipated Effects of SB1Businesses, governments and households may all feel the effects.

The Stupidest of PoliciesThis whipsawing of tariff rates has unnerved financial markets, which on Wednesday, were toying with a liquidity crisis.

View archives

Top Tags

jobs and employment 261
economics 201
state and local government 188
education 186
economic development 171
indiana 171
budget and spending 145
taxes 144
law and public policy 142
workforce and human capital 139
Browse all tags
Reporter / Admin Login

August 21, 2016

The Importers Benefit from Trade

Most Americans think incorrectly about the benefits of free trade. The general view is that it is good to export more than you import, and that the advantage is to the seller. This is how many in the ‘buy local’ movement view the world, along with those folks still clinging to the ‘economic base theory’ of local economic development. It is also precisely how George III viewed the world, but also he had the excuse of insanity.

Trade is the selling of goods made in one place to people in another place. It should be obvious that a favorable balance of trade can hardly have anything to do with growth. After all, the world’s standard of living has grown some twenty fold since 1700, and there is scant evidence we run a balance of trade with Venus.

Trade can enable growth, but only through improving access to technology. To economists, technology isn't necessarily computers and robotics, rather it is how we organize the production of goods and services and how we organize their movement to market. A huge element of this is moving production to the most efficient places. That means moving Happy Meal toys to technically unsophisticated China and orthopedic devices to modern Indiana.

A savvy reader will ask what happens when China modernizes and can produce knee joints? The answer is still that this is good. We want Chinese workers to get better and more affluent. There is an obvious moral argument here, but the pure economics of this result in an increase in the world’s productive capacity. Unquestionably, workers who cannot learn new skills may find the disruption difficult. With or without foreign trade, we must all be prepared to adapt to new technologies.

That leads us directly to the fundamentals of trade, and why it is the importer, not exporter who benefits. It is people, not governments who buy and sell goods. If Americans buy more goods from China than China buys from Americans, as is currently the case, that means we run a trade deficit. This sounds horrible, unless of course you realize that we are effectively trading little green pieces of paper for actual things. We get more things from them, than they get from us, and that begs the question, how can this be?

The reason we can continue this deal is that the trade deficit is identically equal to something called the current account balance. This current account balance is the difference between how much American households save, and how much they invest. And by investment, economists mean the purchase of real items like roads and bridges and new plant and equipment.

Last month’s trade deficit with China was about $29 billion. To finance this, Chinese households had to invest about $29 billion in the United States. Much of this was investment in government spending, but much was also in our stock market, and in new plant and equipment.

Without foreign trade, we would experience a significant decline in household consumption and business and government investment. That would make all of us much worse off.

Link to this commentary: https://commentaries.cberdata.org/852/the-importers-benefit-from-trade

Tags: trade, productivity and efficiency, workforce and human capital, international


About the Author

Michael Hicks cberdirector@bsu.edu

Michael J. Hicks, PhD, is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University. Note: The views expressed here are solely those of the author, and do not represent those of funders, associations, any entity of Ball State University, or its governing body.

© Center for Business and Economic Research, Ball State University

About Ball State CBER Data Center

Ball State CBER Data Center is one-stop shop for economic data including demographics, education, health, and social capital. Our easy-to-use, visual web tools offer data collection and analysis for grant writers, economic developers, policy makers, and the general public.

Ball State CBER Data Center (cberdata.org) is a product of the Center for Business and Economic Research at Ball State University. CBER's mission is to conduct relevant and timely public policy research on a wide range of economic issues affecting the state and nation. Learn more.

Terms of Service

Center for Business and Economic Research

Ball State University • Whitinger Business Building, room 149
2000 W. University Ave.
Muncie, IN 47306-0360
Phone:
765-285-5926
Email:
cber@bsu.edu
Website:
www.bsu.edu/cber
Facebook:
www.facebook.com/BallStateCBER
Twitter:
www.twitter.com/BallStateCBER
Close