Foreign Trade – Good or Bad ?

Foreign trade is a very perplexing subject to me despite my background in accounting and business. I have spent at least two decades trying to figure out who is the winner and who is the looser. The answer to that would seem to be a simple matter of knowing if you are gaining or loosing from foreign trade, but difficulty lies in figuring what constitutes a gain or loss. The foreign trade balance is the most tangled web I have encountered in my entire professional career. I suspect it is that way for a reason. If your trading partner knew that they were consistently getting the short end of the deal it is unlikely that they would want to continue doing business with you. It makes sense to present the information to your partner in such a way so that they think that the are benefiting from the trade even if they are not.

The numbers show that as a nation the United States imports more then it exports by a wide margin. The immediate impulse is to say that this is bad because we pay more money then we receive… so this must be bad. Lets take money out of the equation for a second since money is simply a substitute for the value of goods. If this was a barter system in which goods are directly traded for other goods, and we were importing more goods then exporting… wouldn’t the difference be called a profit? Isn’t it a good thing to receive more things of value then to give them away? This trade becomes even more favorable if we are paying for those goods with our own paper currency… which we print out of thin air.

Lets look at the trade balance from another prospective. Lets consider living standards. Lets compare the living standards of the average person in the United States verse the average person living in China. China has had a high GDP rate for a very long time but that has not translated in high living standards for the average person. The problem with GDP is that it only measure the total amount of money moving around within an economy, it does not measure profits. I have spoken to a number of people who visit China on a regular basis, they tell me that it is a miserable place by our standards and that they would not want to live there.

The difficulty of seeing clearly if we are gaining or loosing on foreign trade is further compounded by the reality that American companies engaged in foreign import and export have both incentive and easy opportunity to manipulate their transactions to result in the lowest tax liability due to the US government. Indeed working around the IRS is a great motivational reason why a company would want to engage in foreign trade in itself.

It is hard to deny the fact that America was built on cheap labor. The first cheap laborers was indentured servants being who were either criminals or debtors. The next form of cheap labor was slave labor. Fortunately that institute was abolished. When slavery was abolished it was replaced by what many consider “cheaper” immigrant labor. Immigrant labor did not require the large upfront investment of purchasing salves or having to look after them through sickness and old age. Then at some point it was realized that it might be cheaper to export the work rather then import the laborers. The point here is that cheap labor has always been a part of the American economy through both good times and bad times.

Over the last three centuries many in the middle class have pointed to that cheap labor and pronounced it as the cause of their hardship, but I believe that if one investigates deeply into that subject, they may discover an entirely different perspective. When we look at this from the perspective of third world countries, where they have no source of “cheaper labor”, we find that they are stuck at a level where they can only maintain themselves at a very basic level of food and shelter.

I once heard that if you are in a Poker game and do not know who the sucker is, the chances are that you are the sucker. For anyone who does not know this, it is common for poker players to secretly team up and coordinate to take advantage of a player. I think something like this might be going on with the foreign trade situation between the United States, its Allies, and China. The Chinese typically work sunrise to sunset, seven days a week in very harsh conditions to provide Americans with consumer goods that make our life more enjoyable. We give them paper money and promises to pay in return. Who is the sucker?