Sunday, March 25, 2018

Trade deficits and why it matters

Recently was shopping in one of the famous retail stores in California. There were these group of teens. The conversation was to this effect. Why should all the products in the store have to come from China? Why isn’t there anything that is made in the USA. Immediate came the reply from one of his friend that - it is child labour. I wondered what a stereotyped answer it was. It was a typical answer for a classic youngster growing up in the western countries. That is what the media and the thought process do it to you. America has an enormous trade deficit with the rest of the world - It is to its advantage whatsoever. Rather than a bad thing for the western world - in fact they should be thanking China and other Asian economies for sending them goods all through the year. It is a result of hard labour from their part. The western countries readily consume its fruits.

As said by one famous economist - America gives a bad name to capitalism while China gives good name to communism. Whatever may be the underlying economic principle of a country in operation - whether its capitalism, communism, fascism, monarchism, feudalism - everything revolves around one big parameter - there is a significant portion of the society that is "very productive". Usually in theory all systems work. Everything tries to achieve the maximum productive nature of the society. None of them are designed for failures. But the way it is preached and practiced (over a period of time) is what makes it fail. If communism can fail in Russia - capitalism can fail in western world , provided the spirit of the ideology is not followed. Communism did not fail Russia - the way it was practised made it fail.

There is an enormous trade deficit the western countries in general, and USA in particular have against developing Asian and some European economies. It is the difference between the import and export a nation has. More import than exports would increase the trade deficits. It adversely affects the long-term prospective nature of the country. It is not logical for a high importing country to be successful economically for a long time. The current US President Trump - acknowledges this anomaly unlike his predecessors. However the way to solve it by introducing tariffs is probably not the right way. USA has a trade deficit of $800 billion dollars a year. It is roughly a quarter of its annual budget. 

The way it all started - nations don't export for the sake of exporting. They export more of what they have and import of what, they don't have enough. That is the primary principle of exports. Ideally the export is not to send goods to other countries without the local economy not utilizing it but instead it is the surplus resource generated by the "productive" population - that is privileged to send it over to other nations that need it - so that we can import those we don't have or insufficient nature of it. Every exports results in a monetary advantage. No one would send products to a consumer without being paid for it. Unfortunately the payment made are usually the "new money". It is just like any other private sector employment. Employers hire workers for what they can "export" out of their daily work - so that at the end of the pay cycle they "import" salary. Exports has to be higher than the import for a productive employer/employee relation and hence productive employment. Any distortion in the set-up leads to a break-up of this relationship. The same principle applies to nations. It cannot be different.

The last couple of decades has seen clear malfunction in the trade deficit patterns of the world. The consuming nation like the western world - keeps consuming for ever. The exporting nations do the hard work for the rich nations. Because countries like the USA don't have anything much to offer to the world as goods and services - the exporting nation is unable to import sufficient amount of goods. There by resulting in the accumulation of reserves by the exporting nation. Even though USA spearheads in certain areas like internet and other technologies - the exports of that is not enough w.r.t the imports of other products resulting in trade deficits every year. On the other side - exporting nations have trade surplus. This accumulated reserves - usually called the forex reserves keep going higher and higher. This money is often visualized to be for the "rainy day" - when money flows outwards of poor & exporting  countries. But in fact - they end up owning more reserves than they actually need. With this reserves fast accumulating and sitting idle in the coffers of the exporting nation - is swindled back as investment money - again to those same nations that don't export enough. Recently we have seen trends where sale of critical pieces are being blocked in the US for fear of run over by foreign governments. Countries like China, which has enormous savings and very high forex reserves of multi-trillions would easily buy-out star companies like google, Microsoft with a fraction of the money. The US would definitely wouldn't like that to happen and put regulation so that they absolute take overs don't happen. In one sense - it might make sense, but it is a bad deal for those nations which has consumed less - and saved/exported enough over may years. They are not able to import enough nor make smart investments.

Going back to the child labour being in question - If it is true - the western countries and all exporting countries from China should feel them so privileged that Chinese children are doing them this great service, while their children are having cushy life with video games and recreation being bulk of the day-to-day activity. Let us not under estimate the hard work of the people who make products that the world needs. There shouldn't be any complains until we give export to serve these hard working kids. Savings come from hard work and under-consumption. Every investment made with the savings - are someone's hard-earned money. Taking advantage of that is both economically and morally bad. So instead of younger generation in the US blaming countries like China for their trade-deficit - they have to think about how to reverse that change. Having a truly free market capitalistic society would be the answer to it. Unfortunately western countries are not that anymore.