Why I don't worry about trade deficits
Bad ideas aren't more attractive just because they are coloured Green. The idea being floated by Green Party MP Rod Donald to only buy New Zealand made goods and products is just daft. But then Greens and economic literacy rarely go together.
And Rod Donald is one of the most economically illiterate Greens around which is why he is in charge of their anti trade policies. Only a few days ago he issued a press release saying that New Zealanders should only "buy Kiwi made" because of the the $5.8 billion trade deficit. "The best antidote for our trade woes is for Kiwis to buy locally made goods and services instead of imported products."
Donald claims that buying local "keep New Zealanders in jobs and helps our trade deficit down, imports do the opposite. Even if a locally made product is a bit dearer, it pays to remember that the cheapest price is not always the best deal."
Now what is quite amusing, beside the numerous fallacies he packs into one press release, is what he was saying only a few years ago in another one of his "don't buy imported goods" press statements. On August 25, 2000 he said "the weakness in the New Zealand dollar reflects New Zealand's growing dependence on other countries. It is no coincidence that the NZ dollar plummeted to an all time low on the same day that our worst ever July trade deficit was announced."
So five years ago the trade deficit, according to Donald, was the cause of a weak Kiwi dollar, the growth of imports was responsible for a low Kiwi dollar. But five years later he is whining that imports have grown to new highs. Now in Donald's economic theory growing imports cause the Kiwi dollar to sink so the dollar should be weaker than it was five years. He was the one who said such weakness and a trade deficit were "no coincidence". But in 2000 the Kiwi dollar was worth 46 US cents US. Now it's worth 70 cents. Another record trade deficit should also be leading to new lows for the dollar but the dollar has been much stronger. He was claiming that trade deficits destroy local jobs. The deficit is higher now than five years and so are the number of jobs.
Now are Green trade policies one way or two way? Do they only apply to New Zealand or do Green politicians around the world take similar stands. While the Greens in New Zealand are pushing shoppers to not buy imported goods are Green politicians overseas encouraging shoppers there to shun Kiwi products? In fact that do. So the other Green Parties are doing their best to increase out trade deficit.
Our local Greens seem to forget that trade flows in both directions. Some 20 percent of our annual GDP comes from exports. If we stop buying imported goods won't nationalistic politicians overseas start encouraging their consumers to boycott our products? What will happen to our major exporting sectors such as dairy products, meats, wood, and fishing?
New Zealand has lots of dairy products, lamb and timber. So we export those products. What we import are things like electronic goods, petroleum, textiles and plastics. We export what we have surpluses of and import what is in short supply here. If the Greens had their way we'd all be eating lamb constantly, whether we like it or not, and there would be no bananas on the shelves.
It seems to me that the Greens never ask themselves what is going to happen with the Kiwi dollars we send overseas. Donald whines that we sent some $5 billion Kiwi dollars overseas. That is what a trade deficit means. It means we sent Kiwi dollars overseas for goods that exceeded the amount spent by foreign nations in New Zealand. So now there are an extra $5 billion Kiwi dollars floating around in other countries.
What does Mr. Donald think is going to be done with that money? I'll tell you one thing they won't do with it. they won't go and spend it on American goods or British goods or even locally produced goods.
How do I know this? Because they have Kiwi dollars. Just try spending some of those Kiwi dollars in Piccadilly Circus or on Times Square and see what happens. I did some shopping in Piccadilly Circus just a few months ago. No one there was clamouring for Kiwi dollars. They were rather anxious to take British pounds however. I know they got quite a few from me that day. So I purchased a big bag of DVDs for Virgin Megastore and I left with the DVDs. I charged it on my credit card. So the bank took Kiwi dollars out of my account and transferred those funds to London. Now a few hundred Kiwis dollars were sitting in London. But Richard Branson's company can't spend those Kiwi dollars in England. They can only spend them in New Zealand or find someone else who wants them to spend in New Zealand.
Each dollar we send overseas has to come back here at some point. Kiwi dollars have no real value overseas. Their value is in the goods and services that they can purchase in New Zealand. So the few hundred dollars I spent on DVDs went to a bank. That bank would have to sit on them or sell them to someone who wanted to spend them in New Zealand. Maybe the dollars were sold to a crazy Brit wanting to take a "Lord of the Rings" tour in New Zealand. Maybe they went to a London market that imports top grade Kiwi lamb for local restaurants. In the end it doesn't matter much what they spend it on since they can only spend those Kiwi dollars in New Zealand. Every dollar we spend overseas makes it easier for other nations to buy from us in return.
But should we actually worry about a trade deficit. Often these deficits are called "unfavourable trade balances". But what is an unfavourable trade? Well, simply put an unfavourable trade is one we don't make.
Each trade that takew place is undertaken only because the individuals involved feel they are better off making the trade than they would be if they shunned the deal. I wanted those DVDs more than the dollars I had otherwise I would have kept the dollars and ignored the DVDs. Each Kiwi consumer is doing the same thing. They only make a trade when they feel that the item they are purchasing is more valuable to them then the money they are spending.
But the protectionist thinks that the dollars are the real value and that value went overseas and all we got was some cars and television sets. Now think about that. The items we imported are wealth not the government bank notes we sent overseas. The easiest way to prove this is to ask yourself why people want money in the first place. They only want it because they can spend it. If the dollar bought nothing then the demand for Kiwi dollars would be zero. The only reason people want money is because money can buy real wealth: goods and services.
So we are getting goods and services for the dollars we send overseas. We are getting goods and services that, in our estimation, are worth more than the value of the money we spend. If these things were worth less than the money we'd keep the money and no trade would take place. The so-called trade deficit looks only at whether or not money is going overseas. But for each dollar we send overseas we are getting things we value more than the dollar we spent. How is that bad?
Finally, I have to wonder why the Greens worry about trade deficits with foreign nations. What about trade deficits within New Zealand. Presumably, unless something really odd happens, there will always be a trade deficit between two regions. One region or the other will have a deficit. Now if trade deficits are always bad, and if trade always means that someone will have a deficit, then the only solution is the one that many Greens would applaud-end all trade.
Either North Island has a trade deficit with South Island or vice versa. Should people on South Island only buy goods from South Island? Should those on North Island refuse to purchase goods produced on South Island? Why does an international trade deficit matter so much but an intranational trade deficit is totally ignored? How about the trade deficit between Auckland and Albany?
I don't worry about the Auckland/Albany trade deficit very much and neither do the Greens. But they do seem to worry about whether we buy more from Aussies than we sell to them. Yet Kiwis are constantly in trade deficits. We North Islanders buy more lamb from South Islanders than we sell them. But they buy more computers from North Islanders than we buy from them. Trade is a two way street. And when trade is free of state interference and other forms of force a transaction only takes place when both parties feel they are better off. It doesn't matter which way the deficit goes in monetary terms since both parties profit from the exchange or they wouldn't make them.
All items in this journal reflect the personal opinions of the author and are not necessarily those of the Institute for Liberal Values or its Board members.
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Institute for Liberal Values, Thursday September 9th 2010. |
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