The old debate about foreign trade has erupted again with Trump’s tariff war. To be honest, for quite some time I could not make sense of it. The trade balance seems a statistic that means a lot of different things to a lot of different people, and the debate seems to gravitate between the statist view of “deficit bad, surplus good,” and libertarian views of “maybe deficit good or at least not bad?”

When I approach an economic event that I cannot get my head around, I try to go back to praxeology. Humans act purposely towards their goals. This basically means looking at basic principles and at what is happening in reality for the individual. That is the question that no one seems to be asking. What exactly is the trade balance and does it describe or relate to an actual real situation?

Definition

The trade balance is defined in layman’s terms as exports minus imports in a country during a given time. If exports are more than imports you have a surplus, conversely, if the trade is “negative” then it is a deficit. Superficially this seems fine, but digging just a little bit deeper we can start to see a lot of issues with this statistic.

Calculation

How is the trade balance calculated? It appears that it is a patchwork of data from different sources with lots of gaps plugged by estimates. It is a cooked-up statistic that can be tortured to conform to a specific narrative, but this is not its main problem.

Monetary Value

Another issue is that we are comparing market prices of goods that get exported with market prices of goods that are imported. But in what market? And in what currency? At what time? If the number is already calculated from very unreliable data of goods quantity, it is made worse by estimating what these prices are for the goods to get to a total monetary value. Anyone should already be very cautious of this statistic. However, this issue is unimportant.

Currency

There are some arguing that a trade deficit is actually good because that is the way that foreign countries get for example dollars to then buy US goods, thus facilitating exports. But is this a real thing? Trade balance supposedly tracks goods and services, and if you add capital movements then you get the balance of payments. But it does not mean that US goods and services are exported in dollars or imported in dollars.

I remember buying an ultrasound scaler from a Chinese factory through an online platform. I paid euros. I never saw a yuan, and I am convinced the factory got yuans and not euros. What happens in real life is that currencies are exchanged during the trade, in my case selling euros and buying yuans. This has some effect on exchange rates but the main driver of exchange rates is monetary inflation. If anything, it is the other way round, changes in exchange rates between currencies have an effect on the amount traded across borders. This problem is not why the trade balance is not useful.

Exchange

By taking into account only the goods that cross the border, the trade balance completely ignores that all trade is an exchange. Saying that I enter into a “trade deficit” with my local coffee shop when I buy a coffee muddles the argument. To get that coffee I exchange money I value less than the coffee I value more. The shop does the same, exchanges coffee they value less for money they value more. So only counting the movement of goods is meaningless. It ignores half of what is happening. However, this is not the problem.

Trade

Adding to its very dubious accuracy, the trade balance also completely misrepresents what is happening during exports and imports. When a company exports a car, it does not gain the whole of the monetary value of that good. A lot of it has already been spent. A large proportion of the price will go towards the costs of producing the car. What is effectively traded is only the profit part. And that is completely different depending on what is traded. Some industries are very capital intensive, like cars, while others have a very low capital intensity, such as software. Counting the whole of the monetary value of a good mixes cars with oranges, steel with software, and makes no sense. Capital structures are different, profit margins are different, labor structures differ too. Regardless of this, this is not the trade balance’s issue.

Reality

Going back to praxeology, people often forget that countries do not trade, individuals do, and they trade purposefully. This is the main problem with the balance of trade and the balance of payments. They do not describe anything happening in reality. So what actually happens during international trade?

Normally an importer will buy a foreign good with their investment and will resell the good nationally with the purpose of making a profit. An exporter will do the same—buy a national good and sell it abroad to make a profit. This was more elegantly described by Bastiat. This means that international trade, the same as any other trade, is an exchange that is mutually beneficial, or else it would not happen. Exports create value and therefore benefit the individuals involved and the community at large, but more importantly imports do the same thing.

So there really is no “balance of trade” as you cannot realistically subtract profit to profit, even less bunch up together different trades made by different people at different times and say “this is an input” and make another group and say “this is an output,” subtract one from the other and arrive at a meaningful number. Voluntary honest trade is always beneficial.

Conclusion

Whenever the trade balance is brought up, our response should be to point out that it is a meaningless statistic. This is important as it is used to justify very negative things which do produce a deficit: taxes in the form of tariffs, subsidies that take resources from the productive to the unproductive, and regulations that destroy resources. All these things cause negative outcomes. We should not give credence to a statistic that has been invented solely to promote government interventions.

This has been known for a long time. We should stop using terms such as “trade surplus” or “trade deficit.” Trade is always a surplus and the only deficit comes from government interventions.