Foreign trade is a growing matter of concern on both sides of the political spectrum – especially in large-sized countries such as the United States. This situation is largely due to a basic misunderstanding of the principle of “trade”. Subsequently, this has led to the propagation of four myths about foreign trade.
Trade is a competition between “them” and “us”
False – Trade is not a competition, but a beneficial activity for both of the parties participating in an exchange, nor is it a matter of countries but rather of the different actors involved. Considering that it is founded on voluntary participation, if trade did not serve the interests of both parties, then it would simply not exist. It is also about cooperation. As soon as trade crosses a national border, it is then termed foreign trade. The equilibrium in foreign trade is nothing more than the sum of all actions of cross-border trade cooperation.
The presence of trade deficit in a given country indicates that it is losing the competition
False – Human prosperity is expressed by consumption, not work. Work is only a means to an end. Imports are goods that we can consume without having to make them. Exports are goods we make but cannot consume. It is preferable to be able to import as much as possible whilst exporting as little as possible. This ratio is known as the “terms of trade”. Incidentally, appreciation of a nation’s currency benefits the terms of trade.
Trade deficit is not primarily due to trade policies but is rather the result of consumption and saving patterns. When it exists, domestic investments exceed national savings. This is only possible if foreign stakeholders are ready to invest capital in the domestic market (and to a greater extent than domestic actors are investing abroad). A continuous trade deficit reveals foreign interests for domestic capital. It is not a debt that must be reimbursed at a specific moment (except in the case of the purchase of government debt securities, which contribute to a mere 20% of the growth of foreign bonds, as is the case in the United States).
Another equation helps reinforce this myth. It illustrates how a simplistic economic understanding can sometimes lead to an even more erroneous conclusion, more so than having no economic knowledge: according to a GDP expenditure approach, where national production (Y) corresponds to the sum of consumption (C), investments (I), public expenditure (G) and net exports (exports (X) – imports (M)), the equation reads as follows: Y = C + I + G + X – M. Whoever has seen this equation, but has not analyzed in detail, might assume that GDP decreases, as the minus sign placed before imports might indicate. However, the equation does not represent a causal link between GDP and its components; it merely describes an identity. Therefore, an increase in exports does not lead to a decrease in GDP. Imports are already part of consumption, investments and public expenditure. They should be subtracted, since the sum of the components must correspond to the domestic production (thus, exports should be added, as they are part of the domestic production, but are not produced by C, I or G.
Relocating part of domestic firms’ activities abroad, is detrimental to the national economy
False – or to be more precise, only partially true. Indeed, if various investments made by domestic companies abroad do not replace their own investments within the country, they are nevertheless complementary. The same applies for the added value, compensation for employees and, to a lesser extent, for research and development expenditure. The investments of domestic companies abroad are used to cover the risks following the decline in the quality of the domestic site, but also, for example, to be closer to customers. This can also increase domestic production in some cases. Relocating increases competitiveness of these companies. Measures that complicate such outsourcing (such as high import taxes on the intermediate consumption of their own subsidiaries abroad) would weaken the competitiveness of domestic companies and increase the risk that they would become fully operational abroad.
Large companies and rich people are the only ones who benefit from trade
False – With regards to trade relations between rich and poorer countries, the latter generally benefit more from free-trade than the former, because they have a comparative advantage, especially regarding salaries in the production of many goods (which should nevertheless decrease as the catching-up process increases). The main victims of a reinforcement of trade barriers would be developing and emerging countries.
Myth narratives: Homer telling the story of his epics. (Jean-Baptiste Auguste Leloir, 1841, Wikimedia Commons)
In the rich countries, the main beneficiaries of free trade are not the companies, but the consumers. They mainly benefit from cheaper prices. The prices of many basic products and services are kept artificially high by trade barriers acting as a very regressive tax, which in this case can also be disadvantageous for the less wealthy.
