My last post sparked a critical post from Tim Worstall and extensive comments both on his post and mine. Tim's criticism was over my use of the term comparative advantage, and I shall not address that in this post. But the discussion on both posts was fascinating. Nearly all of it missed the point.
Basically, people confused international trade with national trade policy. They are not remotely related. National trade policy that aims to achieve a sustained trade surplus does not increase trade. Indeed it may actually reduce it.
Firstly, let me address the (partly justified) criticism that I had incorrectly described international trade as zero-sum. Clearly, from the point of view of individual agents trading with each other, this is not true. One business's exports are not bought at the price of another's: people that fail to compete in one market will look for other markets where they can be more successful, so overall, competition tends to increase global trade.
But from a macroeconomic point of view, international trade is zero sum. If one country has a trade surplus, other countries must have trade deficits to the same value. The absolute volume and value of trade across the globe may indeed increase as businesses compete with each other for domestic and export markets, but that makes no difference to the nature of trade between countries. Whatever the scale of global trade, national trade surpluses and deficits always sum to zero. An increase in trade surplus by one country always means an increase in trade deficit somewhere else.*
So a national trade policy that aims to create a trade surplus is no more capable of increasing the volume or value of trade than a policy that aims to create a trade deficit. Mercantilist policy that depresses domestic demand in order to push businesses towards exporting does not increase trade. All it does is move it out of the country. Total economic activity across the globe includes domestic as well as international trade. If a trade surplus is achieved by depressing domestic demand, therefore, it has simply driven trading activity out of the country. It has not increased trade.
Similarly, mercantilist policy that imposes tariffs on imports or depresses the value of the currency in order to discourage imports and encourage exports does not increase trade. It discourages the economic activity of exporters in other countries. Clearly, if one country is discouraging imports by means of tariffs or currency interventions, exporters in other countries will look for other markets for their goods. But if the majority of countries impose tariffs and/or depress currency values in order to discourage imports, export markets are seriously diminished. Resource-rich countries with a wide diversity of production would probably survive this, but smaller countries and those with resource limitations would suffer. And worldwide, there would be a considerable decline in economic activity. There would, in short, be global depression.
Because tariffs and exchange controls reduce trade, they are frowned upon by international organisations and are the subject of numerous summit meetings and international agreements. The world is now a much less protectionist place than it was in the past, and we are in general much richer for it. Admittedly, those riches are not equally distributed: but that is not a reason to return to the protectionism of old.
However, the subtler form of mercantilism - where domestic demand is deliberately repressed in order to push businesses towards exporting - also reduces trade. This is because when domestic demand is repressed, for example by forcing down wages, imports fall as they become unaffordable. It is the equivalent of imposing tariffs on imports. If only one or two countries operate in this way, exporters turn to other markets as they would if faced with trade tariffs, although it is possible - if the countries concerned are large - that global GDP could be lower than it would have been if these countries were less repressive. But when the majority of countries repress domestic demand in order to promote exports, the inevitable result is a reduction in global economic activity.
Whatever means is used to discourage imports - tariffs, currency interventions or repression of domestic demand - the effect is to discourage economic activity. As long as the rest of the world is willing to absorb trade surpluses by running trade deficits, there may be no net fall in global trade. But for the world as a whole to achieve its output potential, countries must be as willing to import as they are to export. Therefore the desire of some countries to run persistent trade surpluses is damaging to the global economy.
Of course, some countries have trade surpluses simply because their products and services sell better than those from other countries. But to return to where we started - this is where the behaviour of individual agents becomes important. Businesses that can't compete in one market look for others where they can be more successful. In the absence of artificial constraints on trade, therefore, we would expect that national trade surpluses should be temporary: they represent market inefficiencies that should be competed away (in a financial market, they would be arbitrage opportunities). If they persist, therefore, it is because in some subtle way balanced trade is being discouraged. Therefore, countries that run persistent trade surpluses - even if they don't intend to - require structural reforms.
A persistent trade surplus is NOT an indicator of economic strength: on the contrary, countries that are very export dependent are very vulnerable to exogenous shocks. And it does NOT improve global trade. Not ever.
* UPDATE. Jonathan Finegold has pointed out (see comments in his post) that since the deficit position confers as many economic benefits as the surplus position, international trade is not zero-sum even from the macroeconomic position. I would accept this if it were not for the moral values assigned to "deficit" and "surplus" that I identified in my previous post. When the prevailing belief of policymakers is that policy should be designed with the objective of achieving trade surplus, the game is zero-sum, since achieving this objective is only possible if others fail to achieve it.