Do Trade Deficits Matter?

I've seen two interesting posts this weekend on the trade deficit. One from Club for Growth and the other from Greg Mankiw.

From Club for Growth that quotes from Adam Smith:

Nothing, however, can be more absurd than this whole doctrine of the balance of trade, upon which, not only these restraints, but almost all the other regulations of commerce are founded. When two places trade with one another, this doctrine supposes that, if the balance be even, neither of them either loses or gains; but if it leans in any degree to one side, that one of them loses, and the other gains in proportion to its declension from the exact equilibrium. Both suppositions are false. A trade which is forced by means of bounties and monopolies, may be, and commonly is disadvantageous to the country in whose favor it is meant to be established...But that trade which, without force or constraint, is naturally and regularly carried on between any two places, is always advantageous, though not always equally so, to both.

From Greg Mankiw quoting CEA Chair Eddie Lazear:

On the trade deficit: The reason for the trade deficit ... is primarily, to my mind, the capital account surplus. It's not the trade deficit per se. It's that people want to invest in the United States. ... I think of that as a good thing.

As a matter of obvious disclosure this is an issue that has a direct impact on my business. It's also an issue that I knew full well getting into this business that I brushed off as something that has more to do with politics than economics. As Adam Smith pointed out, when a trade takes place, when you buy from me or when I buy from you, we both win. By buying a product or service, I'm saying that it's worth equal to, or more than the money I paid for it.

In my business, many of the products that we bring over are components and subassemblies - basically stuff to use stuff. The wrinkle is that much of these products in turn get exported around the world - another words, the imports allow our clients to be competitive on the global markets. But consider the ridiculousness of it, quoting from a 2004 WSJ article, one blog points out:

Apple's profit margin on iPods could run above 40%, based on production cost data from Wedbush Morgan Securities, whereas Kessler estimates the China-side profit to be in single digits, quite possibly below 5%.

So consider that when the politicians complain about the trade deficit with China. Remember the remarkably low unemployment in the US and Canada, and the rising incomes in both. It's not the trade deficit that matters, it's the income that does.