Why do so many people think a trade deficit is bad?

Question

If it is a result of the individual choices of people in the economy, can't we assume they are acting in their own best interest?

Answer 1

It is not bad for individuals. It means that the country is importing more than exporting. This undoubtedly is resulting in a higher standard of living for individuals (at least in the short run) because they are buying items more cheaply than those produced domestically (otherwise why would they be imported).

The difficulty is in the fact that net wealth is leaving the economy of the country with the trade deficit. More money leaves than comes in from exports. The country with a trade deficit probably isn't specializing enough in those products it can produce most efficiently and export to offset the imports coming in. Over the longer term, this will harm the economy since it will suffer a net wealth drain.

Answer 2

Well, the problem is that the U.S. trade deficit is NOT a result of individual choices. It is largely the result of choices made by Bank of Japan and Bank of China. If they didn't buy U.S. government bonds in large quantities, the dollar would sink somewhat relative to foreign currencies (which still may happen at some point), and the U.S. trade deficit would decrease at least somewhat because U.S.-made goods would become more price-competitive compared to foreign ones. The interest rates would be higher, too, so there wouldn't necessarily be a housing bubble...

Answer 3

If i understood well your question, you are trying to figure out, "why do people think trade deficits are bad?". So... you are not asking about the consequences of deficits itself.

I'd dare to say that the reason why people think deficits (not just trade, but fiscal too) are bad is because they represent an unhealthy financial situation for them (as individuals). Please read on the fallacy of composition, i find the answer to your question there.

-----------------------
The fallacy of Composition is committed when a conclusion is drawn about a whole based on the features of its constituents when, in fact, no justification provided for the inference. There are actually two types of this fallacy, both of which are known by the same name (because of the high degree of similarity).

The first type of fallacy of Composition arises when a person reasons from the characteristics of individual members of a class or group to a conclusion regarding the characteristics of the entire class or group (taken as a whole). More formally, the "reasoning" would look something like this.

1. Individual F things have characteristics A, B, C, etc.
2. Therefore, the (whole) class of F things has characteristics A, B, C, etc.

This line of reasoning is fallacious because the mere fact that individuals have certain characteristics does not, in itself, guarantee that the class (taken as a whole) has those characteristics.
------------------------

If your personal finances are in red, that's bad because unlike the government you can not rise taxes or accumulate debt over years. You either cut your expenses (which is really hard) or you increase your income (also toughy in the short run).

Majority of people know that deficits are bad for their personal finance, they tend to think alike for our government. It's a fallacious reasoning.

Answer 4

Yes we can assume they are acting in their own best interest providing it is a capitalistic society ... meaning no: No 911 emergency assistance, No Medicade (or heath care provided by the government), No roads provided by the government, No military to protect the companies inventories and services.

The whole concept of "Best Interest" is based on a rare economy that we'll probably only find in Russia today.