Right, it’s in the news, the Prez is agitated by trade deficits, economists say not to worry our pretty little heads, many columns are being written.
Can anyone give me a primer on trade deficits and why they’re either such a horrible thing, or just the ordinary way the markets work, depending on your viewpoint?
And, note that I’ve put this into GQ - I’m hoping for an Econ 101 analysis, not a political discussion.
They are typically bad. They put downward pressure on employment and growth as well as downward pressure on currencies. The only country that has successfully navigated persistent deficits without major economic turmoil is the US. Likely the use of the dollar as the world’s reserve currency is what saves us.
Think of trade deficits as the national equivalent of personal credit card debt. It’s usually a bad thing, but not catastrophic as long as the credit companies continue to extend credit to you. But most people eventually run into serious problems this way. Especially if their debt continues to grow, and if it grows faster than their income grows.
Goods and services come into your country.
Money goes out of your country.
The value of the goods equals the value of the money, so as far as the economists are concerned, it is a win/win situation for everybody.
Theoretically, your country will eventually accumulate so much stuff that your citizens are no longer willing to buy, and the foreign countries will accumulate so much money that they want to spend it, and they will start buying your country’s products. In the long run, all of the short-term surpluses and deficits will even out.
If deficits persist for a long time, however, it may mean that a foreign country is cheating in some manner. Or it may mean that your country has lost the capability to produce useful stuff.
A trade deficits with any individual country is not bad per se. If you have a deficit on total trade then your country is borrowing to keep going which is generally a problem long term, if not short.
Frogshit.
The trade deficit/surplus is only one part of the economic equation.
Firstly it’s an aggregate issue, there’s no reason a country needs to have a balanced current account with each and every country.
Secondly a country could offset an overall trade deficit with a net income surplus.
Thirdly, provided your creditors are happy the carnival can keep on rolling.
It’s a bit difficult to answer this question without crowing, so forgive me.
Australia is currently running a significant current account deficit because the value of goods/services imported exceeds the value of exported goods/services (the trade deficit), and payments for interest/dividends to foreigners exceeds our receipts (the net income deficit).
The deficit on the current account has to be financed by net borrowings and/or equity investment from foreign entities. We can’t just print more money like the US can, we have to keep our creditors happy. The current account deficit is currently heading towards AUD 1 trillion and well over 60 per cent of GDP.
In that sense we are in quite a similar position to the US.
Indeed the Australia position is more intractable than the US. Australia has run a current account deficit in every decade since Federation in 1901, bar the first (due to a gold rush). We have always run a deficit because we’ve always been a ‘‘capital-importing country’’, with a small population requiring overseas funding for investment and infrastructure.
For decades the US has been living beyond its means, consuming more than it produces, little household saving, much household borrowing and the US Government running big budget deficits and public debt. Consequence; the US has big current account deficits.
The only long term solutions is for the US to consume less, save more, produce more, export more and import less. The same harsh economic medicine the US has happily and regularly dished out via it’s bankers, the World Bank and the IMF to most of the developing world. (verily economic physician, heal thyself) The low US dollar is a consequence of, and material assistance, to this process.
When in this situation a trade deficit adds to the load on the down side, hence the political focus. Plus it’s saves making hard domestic decisions and forms a key plank of the US isolationist agenda.
But if Australian current account and foreign debt performance is quite similar to the Americans’ and “we” are relatively sanguine in the eyes of the world’s financial markets why are the same eyes are aggrieved with the US? The American consenting adults are judged to be saving too little (about 12% GDP) i.e. spending too much income on consumption while Australia is judged as having as an adequate rate of saving (about 20% GDP) but an outsized rate of investment spending (Aust is about 25%, the US 20%).
So Australia has an economy which has not had a recession for 28 years, the all-time world record, including growing through the GFC whilst running substantial and growing current account deficits.
If our bankers get angsty they could bring the edifice tumbling down. Our trade balance is one of the measures which could do with some remedial action. But there are other measures in the equation and we have been deploying those reforms to good effect for most of three decades.
The Econ 101 analysis isn’t going to concern itself with “good” or “bad”, although you’ll be hard pressed to find many real economists (as opposed to unqualified internet smartypants like me) who think they’re bad.
Let’s say you buy something from Sally in Peru using USD. Sally can trade those USD for Sol. She can use them to buy some American stuff (essentially a stuff-for-stuff trade), or she can buy American investments, e.g. bonds, securities, etc. If she and others don’t really want the dollars, their value may fall, decreasing the ability of Americans to import, and making it easier for others to buy American goods. If she and others want those dollars to buy American investments, the value of the dollar may rise.
Very very simply, a trade deficit means that people want to invest in your country.
:rolleyes:
If you spend like drunken sailors and aren’t paying off your credit card, it isn’t the bank who’s cheating.
The analogies of the finances of nations and their governments to those of personal finance are rather misguided. By this logic, I have a severe “trade deficit” with my local grocery store. And yet my household finances seem to be holding up reasonably well. This whole analogy is bonkers; nations do not function like persons.
A trade deficit is merely and outflow of money and an inflow of goods/services with respect to the nation being considered; nothing less, nothing more. Whether such a trade is “good” or “bad” depends entirely on what is being traded. Took out a high-interest loans to buy foreign made big-screen TVs? Yeah, probably not so great. Spent accumulated cash to purchase foreign-made manufacturing systems so that we could increase output by 10%? Perhaps a good deal. And so on.
Next, one has to consider what the foreign nation intends to do with the money it has received from the trade. Shove the money in a vault at 0% interest (or buy low-yield bonds from the government who issued the currency, which is materially similar)? Okay, have fun. Take the money and buy up real estate in the source country? Hmmm, okay, we traded imported goods for land but my land is a finite resource, so real estate price inflation may result. “How much do I care that some other nation and its people are holding a bunch of my nation’s currency?” Depends entirely on what the foreign nation and its actors plan to do with that currency.
How much I care also depends on how rapidly I can create new value domestically. If I’m creating $100 of new value a year, I’m probably not overly concerned if I then trade away $3 to buy someone else’s stuff. Whatever they decide to do with that $3, it probably won’t hurt me too badly (I hope, anyway). If I’m creating $100 of new value a year, but trading away $97 of that to buy someone else’s stuff, the risk that they can cause issues for me down the road is a lot higher when they eventually try to deploy their assets.
ETA: Some of my points ninja’d (and written better) by **Caldazar **
Geez no wonder no-one calls Trump on his BS, if even dopers think trade deficits are inherently bad.
This is another one of those situations where “common sense” analogizing to household spending leads one to make incorrect inferences (although of course, within that analogy, few people are concerned about their trade deficit with wal-mart).
Yes, all else being equal you probably want to promote exports over imports. But that doesn’t mean it’s desirable or realistic for a country in the US’ position to shoot for a surplus, let alone consider the balance of trade with individual countries as “exploitative” if there’s a deficit.
The united states is a net recipient of foreign investment. People all around the world invest in US assets and the stock market. What could turn over the apple cart? Treating countries that sell us goods that keep the economy firing as our enemies.
In the recent year, the U.S. imported $2.90 trillion of goods and services and exported $2.33 trillion for a net deficit of $570 billion. Services ($240 billion surplus) and aircraft ($96 billion surplus) were America’s strengths. But these gains were dwarfed by trade deficits of automobiles, machinery, electronic equipment and petroleum.
The books must balance, of course, but it is misleading to think of the $570 billion of paper leaving the country every year as “money.” Instead it takes the form of stocks, bonds, and even land deeds. America has always been a big player and Americans are acquiring large amounts of foreign stocks and bonds. But, on balance, foreigners are buying more of us then we are of them!
Over the past 25 years, the percentage of U.S. equities owned by foreigners has increased from 5% to well over 15%. Percentage of U.S. corporate bonds owned by foreigners has almost doubled over the same interval and is now over 40%, surpassing a record set in 1986.
Perhaps this doesn’t matter to most of us. Do I care whether the biggest shareholders of Exxon have names like {Smith, Jones, Fidelity Investments} or names like {Wang, al-Saud, Nomura Holdings}?
A couple of points that may be worth mentioning.
First, it’s just really basic math that some countries will have overall trade surpluses and some will have overall trade deficits. It’s just not realistically possible for every country to have exactly (or even roughly) balanced trade accounts, and if someone somewhere has a surplus, someone has to have a deficit, and vice versa.
Second, it’s widely accepted by economists that the fundamental driver of trade balance is national rates of savings vs.spending. The U.S., overall, spends a lot and saves little. For example, take a look at this CNBC chart from 2015 (literally the first decent reference I could find in a quick Google search). China’s gross savings were equal to nearly 50% of GDP, while the U.S.'s gross savings were under 20%. It’s just basic economics at that point - the U.S. spends a lot more relative to GDP than China does. We’re going to have a trade deficit with them.
Other factors affect the balance of trade, of course. “Unfair” trade practices do exist, and China has been plausibly accused of engaging in a number of them; intellectual property theft, for example. But even on a perfectly level playing field, the U.S. is going to have a trade deficit with China, and a lot of our other trading partners, just due to our comparatively low savings rates.
If U.S. politicians and policy makers really wanted to reduce trade deficits, they’d have to pursue economic policies that would encourage savings, and discourage spending and borrowing. Things like raising taxes and implementing a national sales tax, sharply increasing interest rates, and sharply cutting government spending. That would be far more effective than tariffs. That would also be brutally painful to most Americans, and thus not very likely.
Not to mention, as other posters have mentioned, there’s really no particular reason to think of trade deficits as inherently “bad”. In particular, there’s no actual economic or fiscal reason to view the U.S.'s current trade deficits as unsustainable or harmful.
Whether good or bad, overall trade deficits are certainly unsustainable in the very long term. Read the post immediately prior to yours. If not paid for with current production, America will be selling assets to import consumer goods. True, there may be no need for concern in the near term.
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This is a really important point - remember, the trade deficit is caused by a corporation making the decision to buy manufacturing robots from Siemens and a person’s decision to buy a Volkswagen. The “Spending like a drunken sailor” problem in this case is not solved if the robots are bought from US Robotics and the car from Ford - if the person/corporation can’t really afford to buy one, they also can’t really afford to buy the other.
Over the long run a country that has a persistent deficit will see the value of its currency decline. Then imports will be more expensive and exports will be cheaper to a foreign buyer.
Which (as noted above) becomes an additional problem if lots of other countries use your currency as a reserve for their own savings and trading. I well remember the constant anxiety about this in the UK in the 60s and 70s. Then it starts to involve issues of national status, prestige and influence (on top of the same problem as any other country where this gets out of control - foreign investors will only lend you money at ever-higher interest rates, if at all).
IANAE, so of course take all of this with a block of salt, but - that’s not really how it works.
It’s not like we’re holding a yard sale of national monuments to pay for big screen TVs. What happens is hundreds of millions of economic actors (individuals, businesses, NGOs, government agencies, etc.) make individual economic decisions every day, the aggregate result of which is that the U.S. winds up with an overall trade deficit. The result of that is that non-U.S. nationals wind up with a lot of $US, which they have to do something with.
As Caldazar points out, what they mainly do with it is invest it back in the U.S. Some of that goes into real estate, a finite asset, but a lot of it goes into stocks, bonds, venture capital, and other financial instruments, and the Chinese are welcome to buy as much of that as they want - we’ll make more. That investment goes into additional hiring, purchases of capital goods, research & development, and so on, driving economic growth. Not all of it is invested productively, of course, but that’s equally true of domestic investment. As long as the bulk of the money flowing overseas from the trade deficit winds up getting invested back in the U.S., which it does, the net effect isn’t much different than if the money never left the U.S. in the first place.
Where a country can get into real trouble, as a couple of posters have mentioned or alluded to, is with a large current accounts deficit. If foreign holders of U.S. currency start deciding to stuff it under their mattress, or, more likely, convert it to other currencies and invest it in other countries, that could create a currency crisis for the U.S. That’s the situation that many smaller economies have found themselves in, which leads to IMF loans, structural adjustments, and severe economic pain.
However, in practice, while the U.S. has a current account deficit, it is small (about 2.5% of GDP, from the latest source I could find) and manageable. And there is no reason I’m aware of to believe that’s going to change.
Now, as I stated at the start of this post, I am not an economist, so I could be completely wrong about all of this. Several Dopers have stated in this thread that the U.S. trade deficit is unsustainable in the long term. I obviously don’t think that’s true, but I’m certainly willing to be corrected. Can anyone offer an analysis (their own or a cite) that shows how and why the U.S. trade deficit is unsustainable?
First note that I wrote “overall trade deficits are certainly unsustainable in the very long term. …** there may be no need for concern in the near term.**” Moreover, we all seem in agreement that weakening of the dollar is a plausible result of trade deficit and, to some extent, will tend to correct imbalances.
It’s frequently repeated here that national finance is different from household finance … but it’s not that different. If my household has monthly income of $10,000 but spends $12,000, is that sustainable? Only if lenders are happy to continue lending and/or our assets rise in value with sufficient speed.
The U.S.'s account deficit is mainly the aggregation of our millions of households. Our debts rise as we happily spend.
You ask for cites. Here’s a 2000 essay by an economics professor. I’ve reddened a phrase congruent to my own remark.
Here’s another essay, which takes your side, I guess. He, like me, points out that transfer of assets and debt instruments is the key effect of deficits, but seems to argue that, while the growth rate of assets is limited, the growth rate of debt instruments isn’t! :eek:
I think you’ve got this backwards! While “converting it to other currencies” is irrelevant — it just means some other entity decides what to do with the dollars — the U.S. is delighted when foreigners stuff their dollars under the mattress (or, stuff them into bank vaults) instead of buying U.S. assets. Foreign holding of U.S. banknotes is estimated at $700 billion (! :eek:) — that’s actual portraits of Benjamin Franklin; when bank accounts are included the total rises further. This “high status” of the U.S. dollar is one reason our trade deficit is so benign! 
I don’t think it’s even theoretically possible for a country’s currency to be the world’s de facto reserve currency, without that country having a trade deficit.
Nonsense. The UK has historically run substantial trade deficits, which have been widening since the 1970s. This is offset to some degree by the pound being a global reserve currency, and by London’s status as the world’s financial hub, so while Brexit may help narrow the trade deficit it’s almost certainly going to kill off the moderating influences.
Not really. They are self-correcting for the most part, since they depress the currency of the country that has the deficit. They also make goods and services cheaper for consumers and businesses in deficit countries, which is a major reason why Americans pay less for their goods and services than the denizens of other developed states.