If All Trade Is Private, Why Worry About Trade Imbalances

International companies buy and sell goods on a daily basis. We all reap the benefits. Chances are the vast majority of products in your home were not manufactured here in the U.S. They were manufactured overseas, primarily in Asia. You may not have a problem with that, but Washington does. Despite private companies conducting the business that gets overseas products into your hands, Washington worries about trade imbalances.

What is the big deal? Trade imbalances represent a fundamental problem for national economies. Governments worry about them because they are an indicator of economic strength and stability. Countries with positive trade balances tend to do better economically than those with negative balances. That is the way global trade works.

Discussing trade imbalances in detail requires looking at several things that are not included in general overviews. These include:

  • private and state ownership
  • government regulation
  • national economics
  • global economics.

Private and State Ownership

It is generally assumed that all trade occurs between private entities. For example, a South Korean company might manufacture computer components that are sold to American PC manufacturers. But truth be told, not all trade is private. In some countries, private control of business activities is a facade. China is a good example.

When American companies think they are dealing with privately-owned Chinese companies, they are really dealing with state-owned entities. A trade imbalance in China’s favor means more money flowing to the Chinese Communist Party. It means more funding for Chinese businesses that think nothing of stealing intellectual property and making it their own.

Government Regulation

Government regulation is an inescapable part of global trade. Companies like Ohio-based Vigilant Global Trade Services exist for the sole purpose of helping their clients navigate the maze that is import and export regulation services. And make no mistake about it, regulation influences trade. Governments use trade regulations to control imbalances by design.

National Economics

As for why countries get so bent out of shape about imbalances, it boils down to national economics. Remember that nations are just an extension of the people that constitute them. It is a nation’s business entities that create the goods and services sold on global markets. So when a nation’s trade balance is positive, its companies are selling more than they are buying. That makes for strong national economics.

Global Economics

Global economics are an obvious extension of national economics. Trade imbalances create circumstances in which some countries have an economic advantage over others. Fundamentally, this is neither a bad thing nor totally unexpected. The reality of the universe is that no two things are perfectly equal. One will always have some sort of advantage over the other.

The problem with trade imbalances is that they can get out of hand. If one or two countries achieve a sizable advantage over the rest of the world, they have a greater chance of dominating global economics for decades. This terrifies politicians. It terrifies Washington.

In the meantime, importers and exporters have their hands full keeping up with global regulations and international trade standards. While world leaders are worrying about trade imbalances, business entities just don’t want to run afoul of the law. It is ironic that many of the regulations imposed by world governments actually create or exacerbate trade imbalances.

Ultimately, trade imbalances are a big deal because they affect politics. Take politics out of the way and they would not matter. People would freely trade among themselves as they saw fit. Unfortunately, there is no getting rid of the politics. And so, governments will continue worrying about trade imbalances ad infinitum.

Rachel C. Carpenter

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