On Trade “Deficits”
The point I want to make here is not original. It is important. And I've been party to discussions that surprised me by showing the point is often not well understood. So...
Imagine we live in an isolated island country, Acirema, which has trade with only one other country, Anihc. Our standard currency is the green baltee leaf. Baltee plants are rare, only growing in one isolated spot. Perhaps our government controls the supply.
For a long time, we had little trade with Anihc. We were happy but had relatively little industrial progress. We made our own shoes, clothes, etc.—nothing that we used on a daily basis was imported. There was little R&D or experimentation. We also had low unemployment (and owing to the lack of concentrated industry, the unemployment was not concentrated in any given area).
Then Anihc merchants began to ask some Acireman merchants if they would like to import mass produced shoes, clothing, dishes, etc from Anihc producers. At first, our merchants could not see why they would do this. But then they saw the prices--drastically lower than what they would have to pay for the same products made at home.
Faced with drastically lower costs for the goods they would sell, the merchants agreed. They knew they could sell the goods for less, undercutting competitors who were either not party to the invitation or who refused it, and improving the lives of their customers who would now be able to afford more goods, save for the future, or invest in their own productivity.
The method of payment from the Acireman merchants to the Anihc merchants required negotiation. The Acireman offered Baltee leaves as it is their currency, but the Anihc merchants preferred Bicku shells. The Acireman merchants quickly agreed to this since Bicku shells are plentiful on Acirema. Trade began.
Some months later, people were happier, able to buy more goods or save money. Some shoe-makers, clothing-makers and the like, were unable to sustain themselves because of the new competition (some of whom get subsidies from their government), but some simply retired and others decided to take different career paths. (Perhaps some really suffered.) In any case, the overall change was positive.
Some months later still, many Acireman people came to see that there were fewer Bicku shells around. Concern was raised. The cause of the reduction in these shells was clear—they were being sent to Anihc in trade for the goods manufactured goods from Anihc.
What happens next is predictable. Loud-mouthed politicians run for high office with a platform promising to end the trade “deficit” with Anihc (this is a deficit only of Bicku shells). These politicians believe we Aciremans must keep Bicku shells in Acirema and make more or all products in Acirema again. And many people believe them. Indeed, these politicians come from both of the dominant political parties.
I submit that should the above-mentioned loud-mouthed politicians win the day, convincing the majority and those with control that they are right, Acirema is doomed. I submit the same would be true if the deficit was of Baltee leaves. Or dollars.
Note: This does not take into account possible national security issues or, perhaps, human rights issues (where supporting businesses in other countries indirectly supports their governments, which violate human rights).