I love aphorisms. They boil down centuries, sometimes millennium’s worth of wisdom into a pithy phrase that sticks in your head.
Some of my favorites include money is power, and whoever has the gold makes the rules.
I like these ones because they make highlight something that modern economists forgot: economics and politics are intimately connected—you can’t understand one without the other.
For example, economists say that America’s trade deficit doesn’t matter. In fact, they think it’s a good thing because it means we’re maximizing our comparative advantage.
Maybe, but that doesn’t mean it’s a good policy. Although there are many economic reasons to oppose America’s trade deficit, I think it’s worth looking at the political ramifications, which are (almost) completely ignored.
1. The Deficit Weakens America Politically
Economists assume that maximizing absolute wealth is in people’s best interests. Therefore, it makes sense to trade with someone if you gain—no matter how asymmetrical the gain is.
For example, let’s say that a new free trade agreement between the US and China would benefit both countries: China’s economy would grow by an extra 10% a year, while America’s would grow an extra 1% a year.
An economist would say that’s a great deal—trade isn’t zero sum, we should both benefit.
But anyone with common sense recognizes that it’s a horrible deal: it empowers China relative to the US to such a degree that it’s not worth it.
Why? Because power is zero sum: when China grows more powerful, America becomes relatively less powerful.
Trade with China may have enriched America, but it’s enriched China much more. In fact, since 1984 China’s economy has grown ten times as fast as America’s—they benefited an order of magnitude more from trade than we did.
Now China has the world’s largest economy, and it’s rivaling America’s hegemony, at least in East Asia. Thanks to our own stupidity and greed, we’ve created a new rival from scratch.
It’s better (and safer) to be a big fish in a small pond, than a shark in a shark tank.
2. Trade Deficits Risk National Security
A country that depends upon another is fragile, it’s vulnerable to its suppliers, and the whims of global markets.
A good example of this is what happened during the American Revolution.
America’s freedom was made possible because the French gave us weapons (80,000 firearms, swords, uniforms), which we could not make ourselves because we lacked industry.
This is why Washington’s second piece of legislation was the Tariff Act, which protected American industries from British competition.
The success of this policy was obvious in the Civil War: the North used America’s protectionist tariffs to develop an industrial base, while the South maximized their advantage in agriculture.
As a result, the South still depended upon British imports at the time of the Civil War (they imported guns, bullets, everything). Because of this, the North defeated the South the moment it captured New Orleans, since this cut the supply of Southern cotton to Europe—this devalued the Confederacy’s cotton-backed bonds so badly that they could no longer afford supplies.
The triumph of American autarky was proven again in World War II, where America’s industrial might out-produced the Germans and Japanese: it was our industrial output, not our accumulation of equipment and wealth, that made us strong.
This is a long-standing truth in the history of warfare.
During the Second Punic War, Rome lost battle after battle against Hannibal of Carthage, but they were always able to rebuild. Rome had a massive industrial base, and native population. Eventually, they wore the Carthaginians down: Hannibal could not afford a single loss, because his army consisted of mercenaries—Carthage was a trading empire that lacked the manpower and production to compete with Rome.
Therefore, once Hannibal was defeated by Scipio at Zama, Carthage was done.
Economic power is military power.
So what does this mean in today’s world?
Basically, America’s relative economic decline is shifting the geopolitical paradigm from a hegemonic, to a competitive power structure—we are moving from a big fish, small pond scenario, to a shark tank situation.
This makes the world less safe because there is no superpower that can preserve world peace, and more competing players means more political friction, and a greater likelihood of conflicts. Remember, the world is most peaceful when one power dominates, consider: Pax Romana, Pax Britannica, Pax Americana.
Conversely, history is most violent when there are a multitude of relatively equal powers, consider: the Chinese Warring States Period, the Hellenistic Age, or Western history from Charlemagne’s death until Napoleon’s defeat, and again after Britain’s decline until America’s ascendancy.
America is sleepwalking into a violent future.
3. The Trade Deficit is Bad for the Environment
I am an environmentalist.
But what does that have to do with trade policy?
Simple: American factories are relatively environmentally conscious, or at least are subject to fair environmental regulation, while Chinese factories are not—every time we offshore a factory to somewhere like China, we multiply the environmental footprint of said factory ten-fold.
I will not provide a litany of examples to prove that China’s industries degrade the environment far more than their American equivalents—this should be common knowledge.
I don’t really like Vice media, but they did a fair expose of pollution problems in China that’s worth a quick watch. It makes my point for me.
If we care about the environment, we should care about limiting the trade deficit.
Frankly, it’d be a much better way to reduce pollution and carbon emissions (if you care about that sort of thing) than switching to green energy. And it’s be cheaper too.
There are many good reasons to shrink America’s trade deficit. Let’s do it.