By Pierre Lemieux
Imagine a country where all resources (labor, land, capital) are used to produce goods and services for foreigners. Its residents, good patriots, import nothing and put all the money they earn from exports under their mattresses. Exports are 100% of GDP, there are no imports, and the trade surplus (in goods and services) is also 100% of GDP. Social nirvana?
Of course not. Our patriots would have nothing to eat and no house to live in. They would be well advised to use some of their export money to bid away from export industries some land and wood to grow food and build houses for themselves. If they go to the extreme, the country will end up in total autarky: no exports, no imports, and a trade deficit of zero.
The theory of comparative advantage demonstrates that our patriots could typically do better by exporting what they have a relative advantage in producing and importing the rest. They could have more of everything. Conceivably but not necessarily, depending on the configuration of comparative advantages, our patriots could choose to import all their goods and services from foreign countries, produce only for exports, and also have a zero trade deficit; both their exports and imports would be 100% of GDP–“total globalism,” as it were.
Our patriots would do even better, as far as their own consumption is concerned, if foreigners shipped them a bit more stuff—say 3% of GDP–for the same amount of exports. Our illustrative country would thus move to a trade deficit roughly the equivalent of the current US trade deficit. Assuming that there is such a thing as social nirvana, a trade deficit seems to be much closer to it than a trade surplus or a trade balance.
Thus, the trade deficit is a false problem. If anything, it looks more like an opportunity. As James Mill said in his Elements of Political Economy (1821), a country gains from its imports, not from its exports:
The benefit which is derived from exchanging one commodity for another, arises, in all cases, from the commodity received, not from the commodity given. When one country exchanges, in other words, when one country traffics with another, the whole of its advantage consists in the commodities imported. It benefits by importation, and by nothing else. … That country, or, more properly speaking, the people of that country, have certain commodities of their own, but these they are willing to give for certain commodities of other countries. They prefer having those other commodities. They are benefited, therefore, not by what they give away; that it would be absurd to say; but by what they receive.
I am grateful to Jorge Morales Meoqui (Vienna University of Economics and Business) for bringing to my attention the letter in which David Ricardo expresses to Mill his disagreement with the idea that “all advantage in trade is derived from the commodities received and not by those which are sent”, as Ricardo put it (The Works and Correspondence of David Ricardo, Volume IX, pp.127-128 and 130). He wrote:
It is the exchange which is beneficial. … I do not see how such a transaction can be separated into two parts and how it can be justly said that one part only is beneficial.
I am not persuaded that this is a substantial critique that changes the gist of Mill’s argument. If you give up an apple in exchange for an orange, the net benefit lies in the orange–in the increased utility that eating the orange brings you over and above the utility from eating the apple. The comparison between all exports of apples and all imports of oranges muddles the water because the exporters and the importers are typically not the same persons, but this is a difficulty inherent in aggregating individuals into collectives.
These problems are a bit more complicated than my stylized models suggest. Yet, a key to understanding the benefits of free trade is the idea that, for “a country,” if one wants to talk in these terms, exports are the cost and imports the benefit.