Every now and then a most well-meaning allegiant will debate with me the notion that the unilateral opening of our borders to any country desiring to sell us its wares is (as I suggested last week) a good thing… “How can higher unemployment be a good thing?” he contends… Implying, rightly so, that the import of low-cost foreign-made goods hits certain U.S. producers…
As Milton Friedman was fond of saying, “it’s a case of the visible versus the invisible.” The visible being the man who loses his job due to his employer’s inability to compete in the global marketplace. The invisible being the man who, were the government to protect any domestic industry with quotas and tariffs, would either lose his job due to the attendant decline in consumer discretionary income (i.e., the consumer pays more for the protected product) or will not advance into the otherwise expanding U.S. industries – which would include those benefitting from our capital/financial account* surplus… That’s right, we do indeed have a surplus, a substantial one in fact…
*The capital account lists capital transfers and transactions involving natural and intangible assets… The financial account, a subdivision of the capital account, lists trade in businesses, stocks, bonds and real estate…
Influenced as we are by the media, the pundit and the politician, we (consumers) simply don’t consider what happens to all the U.S. dollars we send to places like China… The truth is, our trading partners happily take those dollars and buy (or invest in) stuff from the U.S., or they buy stuff from other countries and those countries buy stuff from the U.S… U.S. dollars, you see, are nothing more (or less) than claims on U.S. stuff…
Therefore, contrary to populist opinion, the rest of the world desperately wants U.S. stuff – even, if not especially, low-yielding U.S. treasuries…
Simply put; they trade stuff they produce for dollars we produce, and vice versa… I.e., while it comes and goes in different forms, foreign trade is indeed “trade”, and is therefore always, and unequivocally, balanced… don’t let anyone convince you otherwise…
Have a nice week!
Marty