Ricochet is the best place on the internet to discuss the issues of the day, either through commenting on posts or writing your own for our active and dynamic community in a fully moderated environment. In addition, the Ricochet Audio Network offers over 40 original podcasts with new episodes released every day.
Trade Deficits Are Good
When we buy more goods and services from a foreign country than they buy from us in a given time period, we have a trade deficit with them. That means we are sending them little pieces of green paper (or more usually, digital bits) that represent a future claim on wealth. They can’t eat the green paper or the digital bits (i.e. dollars). They can’t build anything with them. We are getting valuable products in exchange for a future promise. Thus we can consume more now than we would in the absence of a trade deficit.
What do the recipient countries do with the pieces of green paper or digital bits? Since the dollar is the world’s reserve currency, they often use them to purchase goods and services from another country. So Taiwan might give us advanced semiconductors in exchange for digital bits and then pass the digital bits on to Saudi Arabia for oil. Then Saudi Arabia might use them to buy petroleum engineering services from the US, at which time we would be obligated to make good on the promise we made to Taiwan that those digital bits would be worth something. Because dollars flow around the globe, our trade deficit with a particular country is of no concern to us.
Our overall trade deficit is a good thing because it allows us to consume more goods and services now. Even better: because we have the world’s reserve currency, many of these dollars circulate overseas and have not yet (and may never be) used to demand goods and services from us. In 2022 the St. Louis Fed estimated that $1.1 trillion in Federal Reserve banknotes were held overseas. This does NOT include the vast amounts of digital currency held overseas. So foreigners have given us goods worth $1.1 trillion in exchange for banknotes alone. And they are holding them as a store of value and a means of exchange. They have yet to ask us to give them any goods or services in exchange for those banknotes.
(I couldn’t quickly find a number for the amount of US digital currency held overseas.)
Long live the trade deficit and the dollar reserve currency!
And Trump, shove your tariffs where the sun don’t shine. You are screwing up the best deal America has going for it.
Published in Economy
The US dollar is the world’s reserve currency. Lots and lots of global trade is conducted in US dollars without US businesses ever being involved. They idea that US currency sent overseas has to come back to the US eventually is simply not accurate. How much of that currency never returns to the US is, of course, highly debatable.
Seems to me your second paragraph essentially contradicts your first.
And then, in the next paragraph:
Much of what I hear and read – including on Ricochet – implies that the countries we send our money to, must return that money to US, for something to buy from US.
But that’s not true.
Nor do they ever finally have to buy products/merchandise from us, at all. Although when they do, that stuff might be stuff that we imported from somewhere else. So it still isn’t tied to actual domestic production.
And on the other hand, much of what they DO do, is buy debt, which we then also pay interest on, in addition to borrowing it – our own money, in effect – almost directly from ourselves.
That is not a good path to be on.
Let’s take this idea to its logical conclusion. If trade deficits are good, why not be best? Let’s just buy EVERYTHING from abroad? We get valuable stuff and we pay with some ginned-up fiat currency. It’s MMT on steroids.
Actually, most US dollars never leave the US. Unless pallets of greenbacks are shipped to Iran or some such, the dollars are always in the Federal Reserve System. The account owners might be foreign, but the dollars are here.
I am not going to pontificate on this due to lack of deep knowledge.
But that won’t stop me from asking about reciprocal tariffs. Are you saying we should be happy with trade deficits and situations where our exports are subjected to onerous tariffs and “their” exports are not?
If they’re controlled by others, does it matter where they “are?”
It would indeed be wonderful if we could find foreigners who would take your deal. But they will pretty quickly figure out that the United States is producing nothing and that there is nothing they can buy from us in the future will all those dollar bills we are sending them. So your scenario is impossible.
Well played.
I’ll begin by saying that I am in more in line with the OP philosophically..i.e. more on “free” global trade. I will also say that there are some serious issues with the trade system as it exists that really did hurt our own producers and that needs to be addressed. I don’t fully disagree with Oren Cass’s arguments. I would also argue that Donald Trump’s methods etc have cost us the counter revolution as I have argued in other posts and he and his team may well be the most misinformed group to ever sit in the White House if they didn’t see today’s reaction coming in the markets and from other trading partners.
Here’s the thing though…that above statement is just stuff and non sense because it doesn’t matter. Donald Trump was elected President on the platform of massive tariffs….there is nothing surprising in yesterday…he has been talking about it since April of 2024….he was also bantering on about Canada and Greenland and Elon Musk…about deporting and deporting about the unitary executive…all of it he campaigned on and won the election. Thus he gets to make policy. While I don’t agree with him and think he is destroying the last chance to end the progressive experiment (while actually finishing the creation of the executive president) it doesn’t really matter…the American people elected him to do just what he is doing….they elected him knowing full well what he was going to do. I’ve had it with all the pearl clutching at NR, WSJ, even Daily Wire et al yesterday…this is what he campaigned on….what he said he would do….deal with it.
On a different note it will be interesting to see if President Trump and VP Vance have the guts to see their ideas through…the OP may argue that trade deficits don’t matter but as David Bansen argued this morning…the President and VP are convinced they do matter and this is their remedy. Do they have the guts to stick with it through the turmoil…through the pain? Nixon and Reagan did.
Although, if those dollars end up in China, and then China loans them back to us, with interest, that’s a problem.
Yes, I do believe they do. First and foremost, because they are fundamentally convinced that this is the right thing to do (in Trump’s case, for going on 35-40 years now). Additional factor: Trump doesn’t need to worry about reelection.
The reason tariffs don’t work is that real tariffs have never been tried.
He’s enacting tariffs under emergency powers when there is no emergency. It’s sort of like the emergency powers that were exercised during covid, long after any semblance of an emergency had ended.
Maybe I’m being too harsh, but I sometimes wonder if Trump thinks trade deficits are bad because the word “deficit,” to him, always means something bad. I think he may have absorbed this to the extent that no amount of explaining by those around him who know better – and I think he probably does have some bright minds around him in addition to stupid sycophants – can break through this boneheaded insistence.
About the only thing I can hope for is that this fails so spectacularly and so quickly that Republicans have time to publicly disassociate themselves from this disaster in time to recover for the 2028 election.
So it sounds like you wish distress on the country because of a desire that Trump not “succeed.” Would you be OK if these moves succeeded spectacularly?
I’d be delighted if they succeeded. Heck, I’d be delighted if they would just be utterly neutral and have no effect at all. But I don’t think that’s a likely scenario. I expect chaos, a sinking market, and businesses holding off expansion plans because of the uncertainty (and given Trump’s record on tariffs since inaugurated, uncertainty is certain). My hope is that it does this fast enough and thoroughly enough so that 1. – this idea won’t be resurrected; and 2. – Republicans can recover well before the 2028 election.
Thanks. I took “about the only thing I can hope for” too literally.
Anybody?
Do the “tariffs are bad” folks wish to address the tariffs to which we’ve been subjected to for a good long time?
I think the general response to it is that no, those tariffs we’ve been subjected to are not a good thing, but that those tariffs have ultimately hindered the economic prosperity of those countries that imposed them more than it has us.
I think I’ve seen a comment or two recently about how if tariffs are so categorically bad, why do so many other countries do them, but I find that question silly. Lots of other countries (and certain states/factions within the U.S.) also keep trying socialist policies, but that doesn’t mean that socialist policies are actually good.
I’m not entirely opposed to any tariffs whatsoever (I do think it’s probably better for national security to try to protect some industrial capacity at home), and I get the idea of using the threat of tariffs to get other countries to back off on theirs. But I don’t think the current plan Trump has is going to end well. But we’ll find out, I guess.
Their attitude seems to mostly consist of, if those countries want to harm themselves with tariffs, it’s not our problem.
It also strikes me that the same people who oppose tariffs on imported goods, are likely all in favor of “tariffs” on imported LABOR.
Why is imported labor a problem? Because it drives down wages for domestic workers? Sounds rather similar to imported products driving down domestic production and employment.
I’ll admit, I do think this is a good question.
Well, there seems to be more than some evidence that it is our problem.
I have always been anti-tariff, but ignorant enough to not realize what other countries are doing to us.
It seems to me that, if one wants to criticize Trump’s moves, it has to be in the context of addressing what others have been getting away with.
Since 2000, our cumulative trade deficit with China amounts to roughly $7 trillion. It hasn’t done them any harm, let alone harmed them more than us. Quite the opposite.
I agree. “Let them hurt themselves if they want to” strikes me as first-level thinking, if even that much.
Maybe there’s an option of requiring that our trading partners buy our PRODUCTS, not our debt.
Are you sure? As many point out, nobody sees the factory that was never built, the jobs never filled…
I corrected my comment, replacing “less” with “more”.
According to this National Review article, though, these tariff rates don’t even appear to really be based on which countries are actually imposing the harshest tariffs on us.
https://www.nationalreview.com/corner/how-trumps-tariff-table-was-made/
So even if a country has not been putting up trade barriers against us we got to put the hurt on them?
You mean by using guns and tanks to enforce such a requirement?
BTW, how many pro-TariffTrump people are investing bigly in U.S. manufacturing this week to take advantage of all the wonderful things the new tariffs will do for U.S. manufacturing?
Thanks.