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Are Big Trade Deficits Really a Problem for the US Economy?
Who doesn’t like fresh thinking or novel ideas? Certainly the last decade of economic tumult offers opportunity for deep reflection on our priors.
Still, what to make of this assertion from venture capitalist Peter Thiel, who said the following in a speech the other day:
The sheer size of the US trade deficit shows that something has gone badly wrong. The most developed country in the world should be exporting capital to less developed countries; instead, the United States is importing more than $500 billion dollars every year. That money flows into financial assets; it distorts our economy in favor of more banking and more financialization; and it gives the well- connected people who benefit a reason to defend the status quo. But not everyone benefits, and Trump voters know it.
For some perspective, here are brief thoughts from two AEI trade scholars. First, Claude Barfield:
The first order of business would be to get our fiscal/savings accounts in order—so long as we invest and spend more than we save (public and private savings), in open world market someone else will provide the difference—hence the large current account deficit. Other results—money to financial assets, and to well-connected flow from this—though there are lots of ways domestically to get at the “well-connected” if we really want to.
1) “Sheer size.” The goods and services trade deficit was 2.8% of GDP. It peaked at 5.4% of GDP in 2006, when the domestic economy was moving out of equilibrium. That was a problem. As with a number of current protectionist criticisms, Thiel here is talking more about past problems than present.
2) It’s reasonable to say the country with the biggest stock of wealth should be a net capital exporter, and our gross capital exports are the world’s largest. But Thiel uses “developed.” We also have the world’s most developed capital markets. So we also should expect to draw capital from everywhere. It’s not obvious the US should be a net capital exporter.
3) Are our capital inflows distorting? Possibly. But it’s not as if the Fed or other domestic institutions have fought such distortions. We are by definition a large economy, meaning internal variables almost always “trump” external. US monetary policy, investment taxation, and the like are the place to start in criticizing any excess financialization.
4) Are there net benefits for everyone? No, because not every manufacturing job lost is compensated for by a service sector job plus lower prices for goods, services, and capital. But the number of net losers is much less than the number of those who lost jobs due to import competition, for example.
5) The bigger issue is distribution. Benefits have been distributed highly unequally, a legitimate criticism of open trade and investment post China WTO-entry. Focusing on this would help improve Thiel/Trump recommendations. For example, an across-the-board 45% tariff will hit poorest Americans hardest. There’s no economic justification for it. In general, Trump voters are correct that there have been harms from trade. But the harms are being misidentified (manufucturing employment and wages rose under NAFTA) and most of the proposed solutions would make matters worse.
And one more take, this from economist Douglas Irwin in Foreign Affairs:
Published in EconomicsTo make their case that trade isn’t working for the United States, critics invoke long-discredited indicators, such as the country’s negative balance of trade. “Our trade deficit with China is like having a business that continues to lose money every single year,” Trump once said. “Who would do business like that?” In fact, a nation’s trade balance is nothing like a firm’s bottom line. Whereas a company cannot lose money indefinitely, a country — particularly one, such as the United States, with a reserve currency — can run a trade deficit indefinitely without compromising its well-being. Australia has run current account deficits even longer than the United States has, and its economy is flourishing.
“Whereas a company cannot lose money indefinitely, a country — particularly one, such as the United States, with a reserve currency — can run a trade deficit indefinitely without compromising its well-being.”
Print mo’ money! ZIRP to -0! Kill the savers! Make America like Detroit!
My understanding of the trade deficit is similar to Thiel’s, though without the gloom and doom:
After we exchange an American dollar for some cheap piece of Chinese plastic or German automobile, they’re stuck with the dollar. There’s really only two things they can do with it — 1. buy our stuff, or 2. invest in our assets (stocks, bonds, real estate, etc.). The “problem” is that the United States is still seen as a safe haven, so foreign entities invest more here than we invest abroad, thus producing the trade deficit. It could just as easily be called an “investment surplus.”
If the trade deficit concerns us, then we should either create stability abroad, or create instability here.
I can’t say I worry much about the trade deficit. We get goods, they get our IOU’s. Deal.
We do have to repay them.
Which is where deficit spending from the government comes in. They borrow, and the private sector too. The Fed cheats and prints more than the economy grows. But the reserve status of the currency, despite my worries, remains strong because the Corporate Authoritarian States (China and Russia) and the other developed states (Japan-demographics, Europe-demographics, deficits, and quagmire, Developing- Brazil, Turkey, India full of issues and problems, Oil Kingdoms- Oh my!) present so many other risks and instabilities.
In the end, where does China invest to earn a good return at low political, economic, and social risk? The United States or just about any where else? Answer: US of A. (Or maybe Canada, Australia – but there is only so much need in Canada and Australia)
The deficit and the debt are symptoms of a number of things, but for the US they are different than for normal countries. In the 50s and early 60s we obsessed over the deficit, then finally figured out that it was a necessary structural piece of Bretten Woods. Bretton Woods ended and curiously dollar deficits became even less significant with constant adjustment and less fixity. But it’s still a symptom and it matters. It is no longer a necessary structural piece of the international monetary system, we could run surpluses for years without threatening the global system, but we can’t run deficits forever unless it appears that we don’t have to. Funny thing world finance, most of it is in the heads of people who own financial assets, they’re a skittish lot, and run in packs.
The US trade deficit does not come from spending US dollars to buy foreign goods. At present the value of goods and services made in the US and sold overseas exceeds the value of goods and services made overseas and sold in the US. By a pretty fair amount, I believe.
Then how can we have a trade deficit? Because any money we borrow from overseas goes straight to the debit side of the trade ledger. And the US Government borrows a lot of money from overseas. If you want to fix the trade deficit you have to fix the budget.
And guess what? As long as the deficit is the result of borrowing money, raising tariffs only makes the problem worse. Because while it reduces the amount of money spent by the US on goods purchased from overseas, it reduces the amount of money made by US manufacturers selling our goods overseas by even more. We raise tariffs. They raise tariffs. We buy less from them. They buy proportionately less from us. Since we export more goods and services than we import, we end up will less US goods sold.
Want a positive balance of trade? Stop borrowing money from foreign countries.
Seawriter
You’re just trying to find a bright spot in the outcome of the presidential election, aren’t you? I approve. ;-)
If only we could export government employees. Today I read the US presently has only about 12 million manufacturing employees but 22 million government employees. I guess esteemed economists will say this means nothing, too. I can’t refrain from thinking, in this regard however, about the biological principles of parasitism. At some point, the host’s production is overwhelmed by the parasite.
Much of the OP discussion, I believe, rests upon the dollar as reserve currency and the fact that, so far, we have been able to get away with diluting its value quite substantially in order to reduce the burden of our debt for present consumption. This is a giant CON-fidence game and one day, that confidence may well evaporate. I can’t imagine the rest of the world is very happy about this. I hold no US Government debt.
I was unclear on two things here. Are you referring to trade deficits? What does “unless it appears that we don’t have to?” mean?
It seems that you have a misunderstanding of what a trade deficit is. The US trade deficit is, by definition, the difference between what Americans spend to buy foreign goods and services, and what foreigners spend on goods and services made in the US.
Therefore, the second statement must also be false. In fact, the value of goods and services made in the US and sold to foreigners is LESS than the value of the US spends on foreign goods and services by around 120 billion USD per quarter.
This is also incorrect, by definition. Foreign purchases of US financial assets are recorded in the capital account, not the trade account.