My Trade Deficit with Safeway

My wife and I spend over $400 a month for groceries at our local Safeway. Yet those rascals at Safeway buy nothing from us. We have an annual trade deficit with Safeway of over $5,000.

Does this sound absurd? It should. In an economy with millions of vendors to buy from, the idea that I should spend on any company’s products exactly what that company spends on my products makes no sense. Most of us have annual and ever-larger trade deficits with hundreds of companies. If we’re employed, our employer has a trade deficit with us.

Why even mention this? Because the most important person who doesn’t understand trade deficits happens to be the president of the United States. When Trump complains about trade with Canada and Mexico, he doesn’t just stick to fentanyl and illegal immigration. He often complains that people in Canada and Mexico sell us more, in dollar terms, than we buy from people in those countries. On March 12 he complained to Ireland’s Prime Minister about the trade deficit with Ireland.

There’s no reason for us to buy the same amount as other people in other countries buy from us. Donald Trump claims that Canada and Mexico are “ripping us off.” And his Exhibit A is those trade deficits. But when I buy things from Canada and Mexico, I’m not getting ripped off. If I were, I wouldn’t buy.

Another way to see the absurdity of using a trade deficit is to think how we would respond if prices fell. Imagine that the prices of all the goods we buy from Mexico fall by five percent. How could this happen? Say the value of the peso falls by five percent. Imagine also that we have what economists call an elastic demand for goods from Mexico and that our elasticity of demand is two. That means that when prices fall by one percent, we buy two percent more. When prices fall by five percent, we buy ten percent more. So we buy ten percent more physical items and pay five percent less per item. That means that we spend five percent more in total on Mexican imports. If you think that trade deficits are bad, you won’t like this because the trade deficit rose. Yet we got a five-percent better deal. No Safeway customer would kid himself that when that store cuts prices by five percent, he’s worse off. The same principle applies to Americans buying from Mexico. The measure of our gain from buying imports is the difference between the maximum we’re willing to pay and the amount we do pay. Economists call that consumer surplus. When the amount we pay falls, our consumer surplus rises: we are better off, whatever happens to the trade deficit.

Famed 18th century economist Adam Smith, as he often did, said it best: “Nothing, however, can be more absurd than this whole doctrine of balance of trade.”