Trade Balance vs Trade Volume

In a generally well-written piece criticizing the Bush administration’s fondness for bilateral trade agreements, Bruce Bartlett writes:

A 2003 study by the Congressional Budget Office found the economic potential of bilateral agreements very limited. It noted NAFTA, one of the largest such agreements, had virtually no effect on the U.S. trade balance with Mexico even after eight years. However, the study also noted there might be important noneconomic reasons to support free trade agreements. [WaTi]

The balance of trade is not a measure of economic well-being (though it can signal problems in the economy). It’s an accounting figure that must balance vis-a-vis the capital account (or in the case of capital immobility, balance to zero itself). A more appropriate measure of the economic potential of bilateral agreements is the trade volume, though it too is not a measure of welfare.

To illustrate via the most extreme example possible, imagine a world of two countries with immobile capital. Under both autarky and free trade, each nation’s trade balance would be zero. Clearly there would be welfare differences between these two policy-worlds. Volume, though not a welfare measure, is a more relevant statistic than balance.