Nations Don't Trade

We hear often of the U.S. trade deficit with countries like China and Japan, with the implication that nations trade with each other. Technically, nations do not trade with each other. Consumers and businesses in the U.S. buy products from businesses in Japan and China and other countries, and consumers and businesses in other countries buy U.S. products from American businesses. This is not just a technical issue, but a practical one, because we often lose sight of the importance of international trade when we talk about the "U.S. having a trade deficit with China," or hear about "an imbalance of trade," as if "countries" trade with each other. The "unit of analyis" in international trade is NOT countries, but individual consumers and individual businesses for the most part.

I think it would be more accurate to say, and it would increase our understand of trade, if we said "Conumsers and businesses in the U.S. purchased $75 billion more goods and services from Japanese businesses in 2006, than consumers and businesses in Japan purchased from U.S. businesses. On the other hand, Japanese investors invested $75 billion more in the U.S. economy than U.S. investors invested in Japan during 2006."

For example, if you take your family on vacation to the Bahamas or Europe or Canada, I don't think you would think of that action as contributing to the "trade deficit" or the "trade imbalance," even though your vacation would technically increase the "trade deficit of the U.S." And yet it is millions of individual transactions like your European vacation that make up the "trade deficit of the U.S."

So keep in mind that individuals buy and sell and trade globally, not countries.