Long live negative trade balance

A negative trade balance makes all God’s children uneasy. There’s something, well, not positive about it. Positivity is better than negativity any day, as we must agree.

The same goes for a trade deficit. ‘Deficit’ means shortage, not enough of something. The opposite of that is abundance, which is much better, isn’t it?

Exploiting our kneejerk reaction to words like ‘negative’ and ‘deficit’, economists describe a situation where a country imports more than it exports as an economic catastrophe, a notch short of total collapse. And if you argue with them, they’ll bury you under an avalanche of graphs and charts proving that you are an ignoramus in the science of economics.

But here’s a thing about economics: it’s not really a science because it doesn’t go beyond common sense. As the late Prof. Lewis Wolpert argued, modern science always does.

If we look at photons getting to us from faraway stars by unerringly and, on the face of it, rationally choosing the shortest path of least resistance for millions of years; if we even begin  to consider the implications of quantum mechanics, universal constants or modern genetics with its undecipherable codes, we’ll see that common sense will help us grasp none of these.

Economics is different. It not only doesn’t go beyond common sense but invariably and miserably fails when trying to do so. Economists unfurling all those graphs aren’t trying to elucidate the problem. They are trying to obscure it, and probably for nefarious reasons.

The father of economics, Adam Smith, never had to do this. His books rely on plain common sense to explain a simple problem: how to get out of people’s hair and let them get on with what they know how to do best: make a living. Yet for modern economists, economics is too simple to understand.

So let’s engage in homespun, commonsensical economics to ponder trade deficits. Let’s begin by imagining a butcher and a greengrocer running their shops in the same neighbourhood. Most people living there ignore BMA guidelines and eat lots of meat while shunning fruit and veg.

As a result, the butcher is prospering, while the greengrocer is teetering at the edge of bankruptcy. Thus the butcher can buy all the greengrocer’s produce he wants and gorge himself on Brussels sprouts and broccoli. The greengrocer, on the other hand, looks wistfully at the chops and steaks in the butcher’s window, swallows his saliva and moves on knowing he can’t afford such delicacies.

The butcher thus has a negative trade balance with the greengrocer, and the latter a positive trade balance with the former. And it’s the butcher who is much better off.

Extrapolating from a neighbourhood to a nation, the same observation may apply. One country may be so much more successful than another that it can import more than it exports. Its trade deficit is a sign of prosperity, and long may it continue.

I’m not saying that a negative trade balance is always good. But it isn’t always bad either. It all depends on a multitude of other factors, such as the size and health of the domestic market, the quality of the products and services the country offers for sale abroad, and – above all – political and strategic considerations.

Germany, for example, shows how a positive trade balance can make a country flourish first and suffer second. The Germans know better than anyone how to make things people want to buy. Just look at their cars and you’ll see that, pound for pound, they are better than any other.

The frugal French mostly drive their own cars, but they buy them for price, not quality. Give a Frenchman a Mercedes for the price of a Renault, and you know which one he’ll choose. Replace a Renault with a Ford, and an American’s choice would be the same.

However, an economy that lives by exports may also die by them. That’s what is happening to Germany’s motor trade and other manufacturing industries. Its two biggest markets, America and China, now buy fewer German cars.

Both countries find it easier than the EU to manipulate their currencies, keeping them artificially low. America, because the dollar is the world’s reserve currency; China, because its communist government rules by fiat. A low exchange rate is meat for the exports and poison for the imports – the population finds it much harder to buy other people’s goods, while the other people can gorge on the cheap goods they import.

Add to this the protectionist tariffs practised by China and soon to be practised by America on an even larger scale, and you’ll understand why Volkswagen has had to close three of its factories, with the other car makers (and other German manufacturers) soon to follow suit. This explains why the German economy languishes at zero, soon to be sub-zero, growth and, consequently, why the governing coalition has collapsed.

Donald Trump and most of the billionaires forming his coterie, especially Musk, are protectionists. Fortunately, unlike most European countries, America has a vast domestic market and can do rather well without relying on imports too much. Musk certainly wants Americans to buy his Teslas rather than cheap Chinese exports.

Parenthetically, the prominent role Musk is slated to play in Trump’s administration worries me. His IQ is doubtless higher than that of any Democratic candidate, but man doesn’t live by IQ alone. Bobby Fischer, for example, had an IQ of 184, but he was an idiot in any field other than chess, and insane to boot.

While one can’t question Musk’s cleverness and business acumen, his sanity is open to doubt. I don’t know how else to explain his vast financial commitment to settling millions of earthlings on Mars, which is crazy, and implanting AI chips into people’s brains, which is sinister.

Apparently, his role will be trimming billions from the federal budget – and thousands of freeloaders from the federal payroll. Godspeed to him, and I hope he succeeds where so many have failed. But the problem with madmen is that they may be geniuses in one area and unpredictable eccentrics in all others.

Just like Trump, Musk also bewails foreign imports, and both men don’t care if they hurt American consumers with protectionist tariffs if the Germans, Chinese et al. hurt even more. Trump in particular is at his most populist when he talks about protecting American manufacturers from greedy foreigners.

“They do it to us, we’ll do it to them,” he says every chance he gets. Doing it to them may lead to lower tariffs on American products, which would be lovely. But it may also lead to an out-and-out trade war, which America isn’t guaranteed to win.

This apart, I like the early noises emanating from the Trump team. They want to cut taxes and, apparently, government spending. They also credibly promise to make America energy-independent again by increasing the production of oil and also by reverting to fracking. Idiotic and ruinous net zero also has a target on its back: one good thing about Trump is that he sees all this climate nonsense for the scam it is.

The corollary benefit of increased hydrocarbon production will be a collapse in oil prices, which will hurt the countries one doesn’t mind hurting, notably Russia and Iran. Iran will get it coming and going if Trump restores the strangulating sanctions he imposed in his first term, as he probably will.

That’s what makes national economies more complex than those of families. All economic policies can’t be just about economics. Strategic and political factors inevitably come into play, queering the pitch (or, for my American readers, throwing a monkey wrench in the works).

Yet the purely economic case against a trade deficit isn’t as straightforward as Trump wants his adulating audiences to believe. As often as not, it’s a sign of health, not illness. But I suppose no one has ever won an election by giving two sides of every story.