Wednesday, May 05, 2004

How to reduce the trade deficit

How to get rid of the trade deficit that most nations suffer so dearly from? It is very simple indeed as the picture above shows. Everyone sees only the negative aspects of this event, but there is indeed a positive side to it: it reduces the trade deficit. The French genius Frédéric Bastiat first came to this realization more than 150 years ago. The argument is as follows:

A French business man bought $1000 worth of goods in France and shipped them to the United States and sold the goods for $1200, thus a $200 profit. He bought cotton for the $1200 and shipped the goods from the United States back to France.

This little endeavour did hurt the interest of France in the most serious way, it created unfavourable balance of trade. If the ship had sunk midway in the first voyage, the customs officials would have accounted only for the $1000 worth of goods (in Franks of course) but not the $1200 worth of goods that came from across the ocean, thus, if that would have happened, the trade deficit of France would have been $1000 more favourable.

The problem was, that although highly beneficial for the trade balance, ships do not sink in a regular and predictable way, so Bastiat came up with a better solution:

There is still a further conclusion to be drawn from all this, namely, that, according to the theory of the balance of trade, France has a quite simple means of doubling her capital at any moment. It suffices merely to pass its products through the customhouse, and then throw them into the sea. In that case the exports will equal the amount of her capital; imports will be nonexistent and even impossible, and we shall gain all that the ocean has swallowed up. Bastiat, Frédéric, Economic Sophisms

Postscript: Is this what the Boston Tea Party was all about?

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