Trade Deficit Benefits

I’ve been importing from Mexico for 22 years and can provide some insight to how things work. I buy 1,000 pair of earrings for $2.00 a pair including shipping, let’s say. I turn around and sell them at $10.00 per pair. You might think that sounds like a rip off. Think about it this way: For that two dollars that went to the pocket of a neighbor, eight dollars were transacted here. I paid rent, insurance, advertising, employees, repairs and maintenance on my store, heat, lights, air-conditioning, cost of items damaged or stolen, credit card fees, etc. With some good fortune, I might earn $1.00 from that pair of earrings on which I pay 15% self-employment tax (social security), income tax, and if I didn’t have health care from a regular job I’d have to take that out too. So, for two dollars that left the country a neighbor to the south gets to buy materials to make more earrings and put food on the table.

Now let’s look at goods that travel the other direction. Kellogg’s makes some Corn Flakes in Michigan and sells 1,000 boxes of it to a distributor in Mexico for $2.00 a box who then turns and sells them to a bunch of the little mom and pop grocery stores that operate all over the country. We might imagine that the Corn Flakes would have a similar mark up as my earrings and sell for $10.00 a box. Nobody would buy them, of course. The overhead for the mom and pop store is much different than it is for me. Heat and air-conditioning aren’t usually necessary. They don’t need an employee, nor insurance, and own their space outright, so no rent. The box of Corn Flakes sells for about $3.50.

So, on their end, $2.00 left the country to pay for the Corn Flakes and $1.50 was added to the value in Mexico, whereas for the $2.00 that left our country, we added $8.00 of value.

You might think that we could be buying American earrings. If I were to find someone in the United States to make these earrings and they were to expect a reasonable income from their work, I would probably have to pay $20.00 per pair and let’s say I add that $8.00 to cover overhead so that they retail for $28.00. Remember that my profit before taxes was around $1.00. For a little business like this, $20 is a lot to risk to bring in $1.00, but the risk is actually much greater. These earrings that were appealing at $10 now seem like rather cheap goods for $28, so they sit around and get dirty and must be cleaned, then a pair gets stolen and another one gets scratched up because someone’s child dropped them on the floor. Suddenly, I’m out $60 and I haven’t made any money to pay that overhead.

We may have a trade deficit with a country, but it doesn’t mean we are losing money. Our sacrifice of some funds leaving the country generates a lot of commerce in this country as well as helping to keep a neighbor’s economy viable so they can buy our products, even if our products tend to be more expensive and they can’t generate as much commerce from it. 

We likely have more to lose than Mexico does if we try to make things even more to our favor. Many big American chains have opened up shop in Mexico. Walmart, Costco, Starbucks, McDonalds, KFC, and others have put countless mom and pop stores and food vendors out of business, and turned Mexico into the most obese country in the world. There are already campaigns underway to boycott these business. Mexicans also preferred to buy American products over those from Asia because they were perceived to be of better quality and one there was a tendency to boast about owning an product made in the United States. Mexicans are a very proud people, and would be very happy to let those Corn Flakes sit on the shelf and collect dust.