It’s not the trade deficit that matters

On Wednesday the Australian Bureau of Statistics released its monthly figures for Australia’s merchandise trade in goods and services with the rest of the world for the month of May.

The data reveals that in seasonally adjusted terms the value of Australia’s exports was $18.7 billion and the value of our imports was $19.5 billion, giving a deficit of just over $800 million.

What does this mean? Some economists had expected the deficit to be higher than this. The low figure was supposedly good news.

These commentators would have us believe that when it comes to trade deficits, smaller is better. In fact, according to some of them we’d all be better off if the trade deficit simply disappeared altogether, or if the deficit turned into a surplus.

But are those propositions really true? To see why they aren’t, we need to explore exactly what the trade statistics measure.

Let’s take a simple example: suppose the ABS goes out and measures merchandise trade between you and your local Bunnings store for July.

Suppose you really need a barbecue. If you go to Bunnings and buy one for $99 in July, then the data will show that you “imported” a barbecue from Bunnings but exported nothing to them, giving you a monthly trade deficit of $99 with the hardware store.

Cash isn’t regarded as a good or a service, so the $99 you pay Bunnings isn’t counted as an export. Instead, the ABS regards it as a transfer of assets.

On the other hand, suppose that you aim for perfectly “balanced” trade.

Since it is unlikely that Bunnings will ever buy anything from you, the only way this can happen is if you don’t buy the barbecue – even though you really want it.

The ABS would then report that you imported and exported nothing from Bunnings, giving you a perfectly balanced merchandise trade account.

It doesn’t take a university economics degree to work out that the first outcome is better – even though the data will show you running a trade deficit. You will be better off because you will end up with a barbecue which you believe is worth at least $99.

If, as all those economics commentators tell us, Australia’s trade deficit with the rest of the world is really all that bad, then surely all of the trade deficits between Bunnings and its customers must be just as unpleasant.

The peculiar thing about the “smaller trade deficits are better” mantra is that nobody really believes it.

You can bet that the majority of economists have magnificent barbecues in their backyards, because at some point they happily ran a trade deficit with Bunnings or one of the dozens of other outdoor stores.

We’re also frequently told that “cheap imports” are bad. But if Bunnings raises the price of a barbecue to $199, how would I be better off?

Since there is no way that I could ever produce a barbecue myself, my living standards depend on the willingness of others to supply me with “cheap imports”.

The key lesson in all of this is that the trade deficit figures are worse than useless for measuring what really matters: how the ability of individuals to trade freely with one another improves everyone’s living standards.

Each of us benefits from the ability of retail chains to create millions of little trade deficits and surpluses all over the world, buying goods at the cheapest possible wholesale prices and selling them to the maximum number of people at lower prices than many of their competitors.

All Bunnings asks for in return is not other goods or services, but little bits of plastic we call money. Viewed this way, our ability to export and import things is really just a sophisticated form of technology or production. Bunnings is simply a giant machine that transforms our cash into barbecues.

This lesson is true at the economy-wide level as well: right now, somewhere in Australia, someone is loading coal on to a boat and sending it to China. In a few months’ time a different ship will come back to us, magically laden with cheap barbecues.

International trade is changing the world, one $99 barbecue at a time.

Alex Robson is a lecturer in Economics at the Australian National University and a Research Fellow at the Centre for Independent Studies