As a longtime champion of liberty and free trade, it is not surprising that the United States enjoys one of the highest standards of living in the world. But unless its policymakers act soon, the US could find itself in the same unhappy condition as my own country, France.
Ever since François Mitterrand was elected to the French presidency in 1981, France has steadily raised taxes, increased public expenditures, and imposed additional layers of regulation. Even governments supposedly on the right, under Presidents Jacques Chirac and Nicolas Sarkozy, pursued socialist economic policies. Consequently, France has long suffered from anemic growth and high unemployment -- a perfect example of what can happen when the state intervenes in economic activities.
The downside of government intervention should be obvious to everyone. But that has not stopped politicians such as US President Donald Trump and Marine Le Pen of the French National Front from proposing interventionist and protectionist policies.
Trump, for his part, has called for an audit of his country's current account, in order to understand better the roots of its trade deficit. To Trump's mind, the trade deficit reflects difficulties for American enterprises, and implies that Americans are buying foreign instead of US goods.
Of course, Trump's investigation into every country and every good is sure to be costly. But, even worse, it misses the point, and shows why public policy should be based on valid economic theory, not gut feelings.
So, what can economic theory tell us about the US's trade balance? For starters, consider the case of a man who saves little of his income and wants to invest, in order to reap future returns. If he wants to buy more goods and services than what he can afford on his current income, he will have to borrow money. Thus, to satisfy his desires, the man is purchasing something that is more valuable than what he is selling (such as his labour).
If this man were a country, he would be running a trade deficit. He has an asset-account surplus, and he is essentially selling or exporting claims on his future resources. Of course, he is free to do otherwise. But his current position gives him satisfaction, and he considers it to be the best way to improve his welfare over time. He has accepted that what is borrowed now will be repaid later.
In the case of an entire country, the trade deficit and the corresponding capital-account surplus is simply a consequence of the decisions made by the country's residents. If the inhabitants aren't saving enough to finance the investments they want to make, they will have to borrow money. They do so knowing that the resulting trade deficit will allow them to make more investments, and achieve a higher rate of growth, than they ever could in a closed economy.
This describes the US exactly. The US has a rather low savings rate; but it has significant opportunities for investment, owing to its efficient entrepreneurs and vibrant technology sector. Americans can collectively borrow from abroad because other countries, not least China, save a lot more of what they earn.
Here, it is worth mentioning a strange contradiction in current ideas. It should be obvious that an individual who participates in an exchange does so because he subjectively values what he is getting more than what he is giving up. In other words, purchases are more desirable than sales (which entail getting rid of something that you could otherwise use for yourself).
And yet today's conventional trade wisdom flips this common sense on its head. Imports (purchases) are seen as bad, and exports (sales) are considered good. This idea is completely at odds with how rational individuals behave. But it has gained currency as a tenet of Keynesian economics.
The Keynesian view assumes that one should want to maximise total demand by maintaining a trade surplus. But economic problems, such as weak growth or high unemployment are not caused by a lack of total demand. Rather, they indicate that there are obstacles impeding economic activity.
These obstacles could include excessive taxation or regulation, both of which can discourage work, innovation, saving, and investment. If these factors are the source of economic problems, then forcing changes to the current-account balance cannot be the solution.
Moreover, it is fanciful to think that a trade deficit -- which is merely a reflection of saving and investment activity both inside and outside the country -- can be suppressed with protectionist policies. Protectionism merely reduces international trade overall, by making it harder for importers to buy what they need from exporters; it doesn't change the balance of imports and exports.
Thus, economic theory tells us that protectionism would be especially harmful for the US. In fact, the benefits of free trade are so large that a country should actually liberalise its international trade even if other countries aren't doing the same. As the late economist Joan Robinson once quipped, just because other countries have rocks in their harbours does not mean that you should install rocks in your own.
Lastly, we should consider the role of a country's monetary balance with respect to its balance of payments. If there is one universally desired "good" in which the US specialises, it is the dollar. In exchange for exported dollars, which cost the US little to produce, the US receives valuable goods and services. This is yet another reason for the US not to regret its trade deficit.
Policies aimed at "solving" trade deficits will always fail. The US trade deficit is a byproduct of its financial - and monetary -asset exports. And these, in turn, contribute to the standard of living that countless Americans have come to enjoy.
Pascal Salin, a former president of the Mont Pèlerin Society, is honorary Professor of Economics at University Paris-Dauphine.
Project Syndicate, 2017.
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