A Little Clarity on the Mucky Protectionism Debate

Here's a slice of my end of a friendly dialogue regarding current events. I'm offering this up to inject some clarity into the very mucky protectionism debate:

My open-minded friend expressed his honest, and legitimate, concerns, over the U.S. trade deficit. Here's from my response:

... think about the whole concept of a trade deficit. If one exists, it suggests that, let's say the Chinese, would truly give up a great deal of their resources for a significantly smaller amount of ours. 

I.e., the alleged trade deficit has China providing us with along the lines of $500b per year of goods and services in exchange for $150b worth of stuff from us. If that were true, my goodness!, what a phenomenal deal for us! But of course the Chinese aren't that stupid; they'd never agree to such a lopsided exchange. They, as you know, accept U.S. currency for the difference.

But why on Earth would they do that if there wasn't something the U.S. could ultimately offer up to them (or to someone else they do business with) in exchange for those dollars (there of course has to be or they'd never trade their resources for our currency)?

The money (beyond what buys our exports) flows back to us through what's called the capital account, in which we have a huge surplus with the rest of the world. The capital account accounts for foreign direct investment -- into things like U.S. treasury bonds (funding the govt; i.e., paying for the new tax cuts, coming infrastructure, etc., while keeping mortgage rates relatively low), the stocks that occupy your retirement plan(s), and other investments.

So, again, the capital flows back to the U.S.; some to be used to grow more businesses and to, in essence, fund more economic activity in general.

I would argue that in reality our ongoing "trade deficit" has been a reflection of our wealth and the advantages we enjoy as a nation.

Again, think in terms of foreign producers accepting U.S. dollars -- that only happens if they have a reason to send those dollars right back to the U.S. for goods, services and investments.

Then, in response, to his followup on the national debt:

I share your concerns with the national debt!

Keep in mind, the trade deficit essentially provides the funds to buy the debt. I.e., you and I buy cell phones and stuff, not treasury debt. The folks abroad who sell us the stuff take our dollars, convert them to their local currency, and the agencies/individuals/institutions who end up with those dollars buy -- among other things -- our treasuries. Essentially, we get stuff, and our dollars ultimately turn around and fund our government.

Protectionism (lessening the flow of U.S. dollars into the global community) would actually exacerbate/quicken the ultimate problem you're concerned with. The worst thing in the world for this scary path we're on would be to adopt an isolationist stance. 

In the end, the more we have access to the rest of the world's markets and its human capital -- and it to ours -- the better off we'll be...

Friends, just because someone makes the claim that we've been abused by our trading partners don't make it so. 

In fact, all you need to do to prove the opposite to yourself is to consider life in these United States versus life in those markets (particularly those emerging markets) that are supposedly "killing us". How utterly preposterous! 

In fact, our history of international trade largely explains our virtually unequaled prosperity.