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Trade Deficit vs Wealth Production

Trade Deficit vs Wealth Production

Let’s start with a definition: Trade Deficit is also referred to as “net imports to exports”. Basically the U.S. companies pay a tax (Tariff, or Duty) to foreign countries for the privilege of selling their products there. And foreign countries export goods to the U.S. for sale here. Currently and for a long time now the value of goods exported from the U.S. minus the value of goods imported to the U.S. has resulted in almost $800 billion dollars/year less goods exported than imported. The U.S. is therefore a “debtor” nation. But it is important to distinguish between national debt and trade debt. National debt results when the government collects less in taxes than it spends, and when the private sector spends more than it earns. The real focus when it comes to the wealth of a nation is not whether it is a creditor or debtor nation, but whether it can produce industrial wealth. Whatever tends to reduce industrial development tends to reduce national wealth. 

When a foreign country such as Canada taxes U.S. imports Canada derives revenue for its government. The tax also makes the imported goods more expensive for Canadians as compared to Canadian goods of the same type and quality. The result is that Canadian goods have a competitive advantage over U.S. goods. Canada for example increased the price of milk imported from the U.S. by 270%. Let us presume that Canada began by allowing U.S. milk to be imported into Canada tax free. In response to serving a larger market than just the domestic market, U.S. milk producers expanded their businesses by investing more in capital goods and labor. If Canada now begins to tax U.S. milk imports it has the effect of reducing the foreign market for milk. The investments made by milk producers in capital goods and labor has now resulted in over supply and fewer profits, which ultimately will mean laying off workers and idling production facilities.

When U.S. producers are dependent upon foreign markets, foreign governments have some control over U.S. wealth production.  According to Dr. Thomas Sowell, being a debtor nation does not diminish the wealth of the nation. It may be presumptuous to disagree with Dr. Sowell, the preeminent economic expert, but the wealth of nations depends upon wealth production, and wealth production is dependent upon demand for its goods. Manufacturing goods is how a country becomes wealthy. When the U.S. allows foreign manufactured goods to enter the county which can be produced for less than the cost of domestic production, demand for foreign manufactured goods increased and demand for higher priced domestic goods decreases. Over time the result is obvious. Domestic manufacturing decreases along with domestic wealth production. 

While it is true that imposing taxes on imported goods will likely result in higher prices for those goods, the overall effect protects high paying manufacturing jobs, the net effect is that as production and profits of manufacturing increases, demand for industrial labor will increase. Competition for laborers will increase industrial wages. It is also true that consumers who work in the “service industries”, where the wages are typically lower than in manufacturing, these service workers will initially experience a reduction in their buying power; however, since the “service industry” services manufacturing, as manufacturing gains market share over imported goods, domestic production and profits will increase. Since the increase in production will demand more services, competition to provide those services will increase service wages. To be sure, it is a misnomer to refer to services as an “industry”. Industry involves the processing of raw materials and manufacturing of good. Services which support industry are not wealth producing. Wealth is produced when the application of labor increases the value of the product whereas the application of service labor adds cost but does not increase the value of the goods produced. 

Consider the effect of allowing foreign steel to be sold in the U.S. While it is true that less expensive foreign steel has been a good thing for the building construction industry, it has had the effect of destroying U.S. steel manufacturing. Whereas once the U.S. was the largest producer in the world of steel, by far, it now must rely upon unfriendly nations to supply our war machine. Allowing foreign nations to control our access to steel has endangered Americans since America’s capacity to wage war depends upon a strong manufacturing sector. When computing the value of imports and exports, economists are not factoring in all the “unintended” consequences. I use the quotes to indicate that the ultimate effect on our nation’s security should have been obvious. 

In conclusion, over time creating an even playing field for domestically produced goods by imposing taxes on foreign goods sold in the U.S. will strengthen the U.S. economy, create high paying manufacturing jobs, reduce dependence upon foreign markets, and enhance our national security.