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https://www.wsj.com/articles/a-brief-introduction-to-trade-economics-1531074006

OPINION | COMMENTARY

A Brief Introduction to Trade

Economics
Why de icits are normal, especially for a country like the U.S., and what is comparative advantage.

By Alan S. Blinder
July 8, 2018 2 20 p.m. ET

A view of at the Yangshan Deep-Water Port in Shanghai, April 9. PHOTO: JOHANNES EISELE AGENCE FRANCE-
PRESSE GETTY IMAGES

Treasury Secretary Steven Mnuchin assured us on May 20 that the incipient trade war was “on
hold.” Well, I guess the “hold” came off. The U.S. is now skirmishing with China, the European
Union, Mexico and Canada. Yes, even Canada.

Let’s review three important truths about international trade that, unfortunately, are not yet
self-evident to President Trump.

First, when you’re dealing with multiparty trade—whether among people, businesses or
nations—bilateral surpluses and deficits are the norm, not aberrations. Yet Mr. Trump seems to
interpret any bilateral trade deficit with any country as a sign that America is “losing” or being
“taken advantage of” by that country.

Nonsense. Think about your personal trade patterns. You almost certainly run a large,
persistent surplus with the organization you work for. It pays you for your work, but you
probably buy little or nothing from it. Rather, you take the money you earn and spend it
elsewhere—on rent, at the local supermarket, at restaurants and dozens of other places,
thereby running trade deficits with all of them. You probably can’t name a single trading
partner with whom you have balanced trade.

So it is with nations. If you examine bilateral trade flows, you find surpluses and deficits
everywhere. That’s how trade works.

But that doesn’t mean that when you add them all up, the nation should necessarily have a huge
multilateral trade deficit with the rest of the world, as the U.S. does. Why is the U.S. different?
The second truth is a bit less self-evident.

Imagine a nation whose citizens don’t save much, and whose government actually saves a
negative amount by running persistent budget deficits. (Guess which country I have in mind?)
If that nation still wants to invest for the future, where does it turn for financing? If the nation
is creditworthy and attractive to foreigners, it can borrow what it needs from investors in other
countries. That’s what the U.S. does.
Put differently, Americans sell paper assets to foreigners (run a capital-account surplus) each
year in an amount equal to the trade deficit. Mr. Trump, like the mercantilists of the 18th
century, calls that losing. I call it arithmetic.

Let’s think about the alternatives to foreign borrowing. The U.S. government has tried just
about everything to get Americans to save more, but Americans are a bunch of spendthrifts.
The government could run smaller budget deficits, but the Trump administration just took a
couple of giant leaps in the opposite direction. Or, worst of all, we could invest less and be
poorer in the future. Ultimately, given America’s domestic profligacy, its ability to borrow from
abroad is a blessing. And borrowing from abroad means running trade deficits.

This brings me to the least self-evident of the three truths: the principle of comparative
advantage. A snarky mathematician once challenged the great Paul Samuelson to name an
economic proposition that is true but not obvious. Samuelson’s choice was comparative
advantage, which shows, among other things, that there are mutual gains from trade even if
one nation is better than another at producing everything.

Here’s a homespun illustration. Suppose a surgeon is also a whiz at house painting—better than
most professional painters. Should she therefore take time off from her medical practice to
paint her own house? Certainly not. For while she may have a slight edge over most painters
when it comes to painting walls, she has an enormous edge when it comes to performing
surgery. Surgery is her comparative advantage, so she should specialize in it and let some
others, who don’t know their way around an operating room, specialize in painting—their
comparative advantage. That way, the whole economy becomes more efficient.

The same principle applies to nations. Even if China could manufacture everything more
efficiently than the U.S. can (which it can’t), it would still make sense for the U.S. to specialize in
the goods in which it has comparative advantages, and then trade with China for the things it
wants but doesn’t produce. Both countries wind up getting more for less.

Now let’s put those three truths together. First, international trade benefits all nations (though
not every person in every nation), so all countries lose when trade is disrupted. Second, in
multicountry trade, it is normal and no cause for alarm to see bilateral trade deficits and
surpluses. Third, when a country invests far more than it saves, that nation will have a large
multilateral trade deficit—and therefore bilateral deficits with many nations.

Does all this exonerate China’s unfair trade practices? Not at all. But the problems there reside
mainly in intellectual-property protection, not in the bilateral trade deficit.

Mr. Blinder is a professor of economics and public affairs at Princeton University and a former
vice chairman of the Federal Reserve. His most recent book is “Advice and Dissent” (Basic,
2018).

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