Nothing, however, can be more absurd than this whole doctrine of the balance of trade.
        —Adam Smith, The Wealth of Nations

With protectionist sentiment sweeping through policymaking circles, we are going to hear a lot about the trade deficit Americans are running. Because the trade deficit regularly purports to show that Americans are purchasing more imports than exporting American goods, protectionists tell us that we are losing our competitive advantage. The solution protectionists offer is to add trade barriers that obstruct imports.

There is a problem with this approach, however. The trade deficit is itself a flawed means of measurement. We shouldn’t rely on it anymore. Indeed, we should never have relied on it in the first place.

Let’s say that you buy a widget. If that widget was assembled in another country you have, in theory, contributed to the trade deficit. This despite the fact that your purchase won’t indebt the United States to those other countries in the slightest. If your widget was put together in a plant in the United States, a plant that employs Americans but is foreign owned, you still have contributed to the trade deficit, since the balance of trade compares the sales of U.S. owned firms to foreign-owned ones, world wide. In fact, we should be encouraged that widgets from the plant are being bought by consumers. After all, the more widgets are purchased, the more that plant can expand and create more jobs for Americans.

But for some reason, instead of being encouraged, we are told that the purchase of foreign goods—even from a plant in the U.S. employing Americans—is a bad thing because it contributes to a trade deficit. The false trade deficit metric discourages us from engaging in consumer activity that is designed to help the American economy and instead is designed to spur on protectionist sentiment.

A barter economy is a primitive one and the trade deficit metric encourages barter on a global scale.

Economics professor Donald Boudreaux points out that if we export materials to China and a factory is built there, we will have technically reduced our trade deficit. But if we take those same materials and have Americans assemble them in a factory in the United States that is foreign-owned, we will have supposedly contributed to the trade deficit, even though in the second circumstance, we will have encouraged both foreign investment in the United States and the creation of American jobs. Somehow, this second circumstance gets cast as a danger to the American economic position, despite the increase in employment and investment it brings.

When we look behind the scary “trade deficit” headlines, we see that trade activity is robust and that the rise in both imports and exports bodes well for the future of trade and globalization. The numbers and arguments behind the trade deficit also mask the fact that while a product may have been assembled in one country, its parts, its design and its brand name may be from other countries. The trade deficit does not measure these facts but they are very important in determining the true trade and economic picture.

If the trade deficit between countries is indeed a cause of deep and serious concern, we should be equally concerned about other more mundane trade imbalances. How about one that John Stossel brings up? Stossel points out that while we buy products from our supermarkets, those supermarkets never buy our products. This creates a “trade deficit” of sorts, and if we want to be consistent, we ought to be concerned about this trade deficit between individuals and their respective supermarkets. But the existence of this “trade deficit” is a good thing. As Stossel says, “Imagine if I could only buy from the store to the extent that it needed my services. I'd starve. That would be barter, and mankind dumped barter for the money economy eons ago precisely because it is so inconvenient.”

A barter economy is a primitive one and the trade deficit metric encourages barter on a global scale. Commonsense economic transactions like purchasing an import or having a foreign entity invest in American businesses are decried by protectionists because they increase our trade deficit and supposedly indebt us to foreigners. But increases in imports and exports are signs of a healthy global economy and foreign investment is a sign of confidence in the American economy. It’s puzzling that instead of celebrating increases in imports and exports and welcoming foreign investment, we are fretting over these developments and thinking that they are signs of a weakening American economic position.

Foreign investors do not bank on the American economy out of spite or malevolence. They invest because they want to make money—lots of it.

People are concerned, of course, about the power of foreign investors because the instinctive belief is that those investors will be able to somehow hold America hostage. Should they decide to cut off the flow of money from abroad, the thinking goes, we will find ourselves in dire straits. And since foreign investment increases the trade deficit, people are led to believe that any increase in foreign investment equates to a decline in American competitiveness.

But foreign investors do not bank on the American economy out of spite or malevolence. They invest because they want to make money, lots of it, and they believe that America is a good investment thanks to its vibrant economy, its embrace of capitalism, its low tax rates, and its relative freedom from excessive regulation when compared to many other countries (we can, of course, do more to rid ourselves of excessive regulations). Moreover, far from being an outgrowth of a decline in competitiveness, foreign investment in America is a testament to the strength of American competitiveness and the vibrancy of the American economy as a whole. Foreign investment is a relatively new phenomenon and it is natural for people to be concerned about what the consequences of a new phenomenon might be. But the answer to such concerns is education and explanation regarding the benefits of foreign investment. It is not to coddle fears of foreign investment and free trade with dire predictions of what a high trade deficit or a high level of foreign investment might have in store for us.

The trade deficit metric was never a useful one and with the continued onset of globalization and international interconnectedness, the trade deficit is an especially outmoded means of economic measurement. Focusing on the trade deficit encourages the implementation of poorly designed protectionist policies that will only serve to undermine the American and global economies in the long run. There are many better ways to get a snapshot of the trade and economic situation America and the world find themselves in. Let’s use those more reliable methods of measurement and dump the trade deficit once and for all.

Pejman Yousefzadeh is an attorney living in Illinois. He blogs at A Chequer-board of Nights and Days, and Red State.

Image credit: Photo by Flickr user Kevin