Longtime readers know that I am not the biggest fan of Paul Krugman, especially when it comes to his advocacy of government inflation and budget deficits. It’s especially ironic when I criticize Krugman’s writing on international trade, since that’s the area in which he won the Nobel Prize. But here we go again, as Krugman’s recent New York Times column on Russia features commentary on trade surpluses that is at best very misleading.

Krugman on Russian Trade

The context for Krugman’s article is the West’s trade sanctions on Russia in retaliation for the invasion of Ukraine. Because other countries are still importing Russian oil and gas but exports to Russia are effectively discouraged, Russia now has a large trade surplus. But even though many people (including fans of Donald Trump) take it for granted that trade surpluses are a good thing, Krugman argues to the contrary:

The effect of sanctions on Russia offers a graphic, if grisly, demonstration of a point economists often try to make, but rarely manage to get across: Imports, not exports, are the point of international trade.

That is, the benefits of trade shouldn’t be measured by the jobs and incomes created in export industries; those workers could, after all, be doing something else. The gains from trade come, instead, from the useful goods and services other countries provide to your citizens. And running a trade surplus isn’t a “win”; if anything, it means that you’re giving the world more than you get, receiving nothing but i.o.u.s in return.

Yes, I know that in practice there are caveats and complications to these statements. Trade surpluses can sometimes help boost a weak economy, and while imports make a nation richer, they may displace and impoverish some workers. But what’s happening to Russia illustrates their essential truth. Russia’s trade surplus is a sign of weakness, not strength; its exports are (alas) holding up well despite its pariah status, but its economy is being crippled by a cutoff of imports. (bold added)

Although I understand the basic (and important) point Krugman is trying to make in the above excerpt, in his zeal to explode mercantilist fallacies, Krugman swings too far in the opposite direction. Specifically, the sentence I put in bold is at best misleading, and at worst simply wrong. (I should note that this has nothing to do with Keynesian ideology; elsewhere I caught the Wall Street Journal making a similar mistake.)

In the rest of this article, I’ll first explain what Krugman gets right in the above commentary, but then spell out what’s wrong with it too.

What Krugman Gets Right on Trade Surpluses

Krugman is right that in the grand scheme, the benefits of international trade are the goods and services that people in a given country can obtain from foreigners at a lower cost than if they had to produce those goods and services domestically.

The principle is obvious when it comes to an individual household: It would be foolish for the Smith family to “buy local” by growing their own food, making their own clothes, and building their own cars. Instead, the Smith family enjoys a much higher standard of living by focusing on those areas in which they excel—perhaps Mr. Smith is an accountant, Mrs. Smith is a lawyer, and the teenagers work at the mall—and producing far more of these services than the Smith household will personally consume. The Smiths sell the excess services to people outside of their household in exchange for money, which they use to “import” food, clothes, cars, and everything else they want.

A similar pattern holds at the country level. The United States enjoys a much higher standard of living, per capita, by focusing on producing those goods and services in which its people have a “comparative advantage.” Those items made in excess of what Americans consume domestically can be exported abroad and used to buy imports from other countries. This allows the US and her trading partners to consume more (again, per capita) than if each country relied only on items made domestically.

Furthermore, in the excerpt above, Krugman is right that we shouldn’t focus on the jobs that are “created” in export industries. So long as wages and prices are allowed to adjust, in the long run every productive worker can ultimately find a job and earn an income, whether the worker serves the domestic or international market. That’s why if we were to blockade a country and cut it off from the rest of the world, the harm we’d impose would be due to cutting off imports flowing into the country. The workers who originally (before the blockade) were in the export sector could eventually find work producing goods and services for their neighbors. It’s just that they would be earning far lower real wages in the new setting, because they would be missing out on the advantages of the international division of labor.

Where Krugman Goes Wrong on Trade Surpluses

As I’ve argued above, the basic gist of Krugman’s analysis is correct. However, he oversteps by possibly misleading the average reader when he writes: “Running a trade surplus isn’t a ’win’; if anything, it means that you’re giving the world more than you get, receiving nothing but i.o.u.s in return.”

To repeat what I said above, this dubious way of writing isn’t limited to Keynesians; the free-market editors at the Wall Street Journal made this mistake even more explicitly when writing the subtitle to a Robert Barro op-ed. In order to see the problem, we can once again return to a household analogy.

Suppose Mr. Smith asks his two teenagers how their finances are faring. His daughter reports that over the year she earned $10,000 working at a clothing store in the mall and spent $7,000 on her car, clothing, going to the movies, and other fun items. She put the remaining $3,000 into a savings account with her local bank. Mr. Smith’s teenage son reports that he earned $10,000, too, from selling pretzels at the mall. However, the son spent a total of $12,000 on fun items during the year, depleting all of his earnings as well as running up $2,000 in credit card debt.

How should Mr. Smith react to these reports? He might be tempted to praise the daughter, but having just read Krugman’s column on Putin, Mr. Smith instead scolds her. “Julia, don’t think you are ‘winning’ just because you sold more than you purchased,” he complains. “If anything, your report means that you’re giving the community more (in retail services) than you get, receiving nothing but an IOU from the bank in return.”

In contrast, Smith congratulates his clever son, who managed to convince the community to give him $12,000 worth of goodies in exchange for only $10,000 in pretzel-preparation services. Suckers!

Trade Deficits Can Be Productive, Too

In the previous section, I used a simple analogy of a household to showcase how Krugman’s Putin column could possibly mislead readers. Specifically, a trade deficit doesn’t mean that a country is driving a hard bargain with foreigners and getting more imports in exchange for its exports. No, when we measure imports and exports in this context, we are already using money terms. So if the US imports (say) $50 billion in goods from Japan during a certain period, it pays precisely $50 billion for them—that’s what it means to measure in dollar terms.

Before closing this article, I want to avoid giving the reader the wrong impression going the other way. Even though in my Smith household analogy above, it was clear that the teenage son was engaged in behavior that was not sustainable in the long run, that doesn’t mean that trade deficits are a bad thing or necessarily unproductive.

For example, suppose a small country’s inhabitants see the light and all become Rothbardians. Their government adopts amazing policies such as slashing taxes and regulations (or perhaps even dissolves away entirely, allowing for private courts and military defense). The revamped country would enjoy tremendous economic growth as a consequence.

In this scenario, the rest of the world would invest more (on net) in this new Rothbardia than its residents would invest in the rest of the world. This would show up in the official statistics as a trade deficit for Rothbardia. Intuitively, the rest of the world would send real resources (such as oil, natural gas, steel, etc.) to the small country in exchange for partial ownership of the new wealth being created in the laissez-faire powerhouse. (For more details on trade accounting, see my earlier article.)


Professional economists have been trying for centuries to get the public to understand that when it comes to international trade, the benefits flow from the ability to import goods and services on better terms than they could be produced on domestically. The jobs and incomes in export industries are incidental, because workers could find jobs producing for their neighbors if the export sector didn’t exist (after wages and prices adjust).

However, in their zeal to drive home the relative benignity of trade deficits, economists sometimes overshoot and end up leading readers to believe that trade surpluses are bad. But this is incorrect. In general, so long as they are the result of voluntary decisions, trade surpluses make a country richer than would otherwise be the case. There’s nothing foolish about piling up IOUs in exchange for surplus exports, just as there’s nothing foolish about a household living below its means and accumulating financial assets.