David BreuhanThroughout the course of human history, beliefs that were often widely accepted evolved into common practice which impacted societies over many generations. For centuries, many believed that the world was flat. Doctors routinely bled patients to cure common disease. The Church taught that the earth was located at the center of the universe.
We are now beholden to our own forms of inaccuracies, exacerbated by overwhelming amounts of misinformation, widely reinforced through all forms of social media. The most common misunderstanding that is guiding policymakers and core supporters of political parties is the term “trade deficit.”
This incorrect term refers to the amount of physical goods imported by one country from another. The proper term should be merchandise trade imbalance. Payments are made to the exporting nation by its trading partner. This generally occurs in the capital or financial account, which results in the balance of payments between nations being balanced. Loans and other transactions are also made by trading nations to one another, making this statement more comprehensive.
Further, services rendered to our trading partners in the form of consulting and other areas are ignored in the merchandise account. Tourism is also not accounted for as merchandise but is addressed in the total balance of trade.
Isolating only one portion of the total activity regarding trade omits the most important aspect of international commerce, which is that the relationship is mutually beneficial and settlements occur. In 2024, the United States imported $62 billion more goods from Canada than they imported from us. However, Canada is the fifth largest foreign holder of U.S. Treasuries, owning $438 billion of federal debt. Our money has been returned.
Trade is transactional: when one good or service is purchased payment is rendered, usually in the form of currency. It is not barter, as money has evolved over centuries as a more efficient means of conducting commerce.
The notion that Canada, with a population similar to that of California, can purchase the same amount of physical goods as the United States buys from it, demonstrates an ignorance of both practical economics and demographics that cannot be accepted as reasonable.
This same idea, taken to the most microeconomic level, would lead someone to believe that consumers run a weekly trade deficit with the local grocery store and that this imbalance must be rectified by the grocery store buying a physical good from each customer.
This type of idea dominated the world during the Age of Mercantilism, which lasted from 1500-1800. Rulers believed that the amount of gold that a nation possessed determined its value. To obtain more gold, it needed a favorable balance of trade to achieve a favorable balance of power. The term “beggar thy neighbor,” came into being with the understanding that, “I could trade with you, but you cannot trade with me.” Luminaries at the time believed that trade was a zero-sum game.
In 1776, Adam Smith revolutionized economics by asking the right question, “What determined the wealth of a nation?” Taking a page out of Plato and Aristotle’s works, Smith concluded that specialization and trade enhanced the division of labor and that this factor greatly contributed to the nation’s wealth. David Ricardo further expanded the argument, with the concept of comparative advantage in trade.
In 1815, following the fall of Napoleon, Smith’s ideas took hold and the developed world entered the Age of Classical Liberalism. After the American Civil War and the completion of the transcontinental railroad, foreign nations recognized the United States as an emerging nation on the world stage. By the end of the nineteenth century, global trade enhanced economic growth as the industrial revolution allowed for increased wages and a higher standard of living. The gold standard in the United States and Great Britian kept inflation in check. The British Navy assisted in keeping the trading lanes open to support global commerce.
Beginning in 1914, the world entered the “75-year emergency:” World War I, The Great Depression, World War II and the Cold War. Following the fall of communism in 1989, nations reestablished trading patterns that existed in the previous century. Many claimed that global trade was revolutionary, but it was more evolutionary in nature.
Most economists ignore an important event in trade relations that were impacted by the global currency markets. On August 15, 1971, Richard Nixon removed the U.S. dollar from the gold exchange standard. Foreigners were concerned about mounting American deficit spending due to the war on poverty and the war in Vietnam. Fearing a run on the U.S. gold stock, Nixon removed convertibility and exchange rates of all currencies were free to float freely.
The U.S. dollar replaced gold as the world’s reserve currency and became accepted by the Saudis and OPEC as the means of exchange for oil. Other nations were free to devalue, no longer pegged to gold. Their unit labor cost dropped and manufacturing began a decades long withdrawal from the United States. One need only look to August 1971 and observe that the merchandise trade imbalance began when we left the gold exchange standard.
Levying tariffs that are paid by Americans and increasing barriers to entry of foreign goods increases global anti-American passions. We are witnessing a rise of economic nationalism, that has not been seen since the 1930’s. This year anti-American sentiment directly influenced election outcomes in Canada, Australia and Japan. The Japanese Prime Minister resigned, as has the Prime Minister of France. Prime Minister Modi of India recently attended a conference with President Xi and President Putin in Beijing, to map alternatives to American trade policies.
Blockades of soybeans by China and bourbon by Canada against American farmers and distillers are far worse than tariffs. It is a total cessation of trade. Boycotts by tourists to the United States has greatly impacted American businesses.
Addressing non-tariff barriers, cheating, transshipments and other issues with our trading partners is best addressed through dialogue. Employing tariffs, which are paid by American importers to U.S. Customs, will not rectify disputes between nations. History clearly demonstrates the opposite.
Let us be candid: tariffs are paid by American firms and consumers at the port of entry, not foreigners. Hostile trade policy results in retaliation by our partners in the form of tariffs against U.S. exporters, non-tariff barriers, boycotts and outright blockades of American goods and services.
After fifty years of public service, living through two world wars, Secretary of State Cordell Hull wrote, “if we could increase economic exchanges among nations over lowered trade and tariff barriers and remove international obstacles to trade, we could go a long way toward eliminating war itself.” Trade works and has stood the test of time.
Hull’s guidance also serves as a warning. When goods don’t cross borders, armies will.
