The US has had a trade deficit every year for over 40 years. Nothing bad has happened so far and it seems sustainable.
This document provides a detailed and informative look at U.S. payments account from 1946-1960. Table 2 on Page 5 even shows the gold sales/purchases which make each line balance to zero!
The U.S. had a trade surplus in every one of those years. The U.S. also had a trade surplus almost every year from 1960 to 1975, and only a modest deficit as recently as 1991-1992.
The dollar has arguably been a de facto standard for more than a century, and certainly since the agreements signed at Bretton Woods, New Hampshire in 1944.
Yes, this is true, but this has nothing to do with trade deficits. You’d have the exact same problem even if you had no trade deficit and instead you bought $12,000 of domestic goods and services. The fact that your outlays are greater than your income is the issue, not the fact that you’re buying foreign goods vs. domestic goods. It’s just that when it’s foreign actors on the receiving end of your money, it introduces some additional wrinkles and potential risks.
A long-term trade deficit need not be unsustainable. If your income is such that your trade deficits are small compared to your aggregate income and income growth rates, any potential negative effects of the trade deficit are blunted. Now, the United States’ trade deficit may or may not be sustainable; that’s a question best addressed by folks smarter than I am. But there is nothing inherently “good” or “bad” about trade deficits per se (addressing the OP), even sustained trade deficits.
That household would have the same problem, but we’re looking at an aggregate. If Californian households mostly earn surpluses while Oregon run deficits, there would be a wealth transfer from Oregon to California. Admittedly this net wealth transfer might be irrelevant to most of the residents of both California and Oregon.
Please note that I’m NOT arguing against trade deficits; I’m just arguing against some of the simplistic claims being made in the thread.
A trade deficit is, in general, not nearly as bad as some people believe.
Pat Buchanan wants the US to run a trade surplus. But sometimes, that’s actually worse than a deficit.
Back when the Great Recession hit, Germany was in big trouble–because not many people wanted to buy their products anymore.
Where does one draw one’s circle of allegiance? A person wants what’s best for his family, but also what’s best for his town or city. And don’t residents of Oregon want what’s best for the U.S.A., not just best for Oregon? And what about the whole world? Does anyone think it’s all a zero-sum game, that what’s good for the U.S. should automatically be bad for other countries?
One thing I think most of us will agree on: The U.S.A. running trade deficits has been a huge boon for the world economy.
If I go to the store, and I decide to spend $40 on something the seller and I both agree is worth $40, then as far as I’m concerned it was an even trade, not a deficit of any kind. That’s true whether the store is down the block or in China. Basically I don’t think trade deficits exist, at least so long as the trade is free and not coerced in any way.
So the Mods should close the thread? :rolleyes:
As Caldazar points out, the problem in this scenario is the debt, not who it’s owed to. The trade deficit is a result of overspending and relatively low savings rates, not a cause. I’d agree that aggregate U.S. spending is too high and savings too low, but I really don’t see how having a trade deficit makes the results worse.
Thank you. Interesting reads. One thing to note - both essays are primarily discussing the current account deficit, not the trade deficit per se. As I noted in my post, a large current account deficit is indeed problematic, and it is true that large trade deficits tend to drive current account deficits. However, the U.S. current account deficit seems to be manageable at the moment. Note the first essay you cite is from 2000(!) and is predicting…something by 2005. Nonetheless, here we are in 2018, and while the U.S. has suffered severe economic problems, a balance of payments crisis has not actually been among them.
Also, note that Catherine Mann, in that essay, argues:
And yet, again, here we are, 18 years later, and there’s no sign of that happening. Just how long term is long term?
I wrote a rather lengthy reply to the above, then thought better of it. It’s been a long time since I’ve studied international economics, and I realized after writing my response that I’d gone beyond my own competence. In brief, it’s my (possibly flawed) understanding that as long as foreigner holders of $US continue to want $US and continue to view the U.S. as an attractive investment destination, the flow of $US overseas doesn’t really matter, as the bulk of it flows right back in as investments. It’s when exporters want to dump all the $US that they get that the problems arise. Again, current account deficit, not trade deficit (although the two are related). And, again, the U.S. current account deficit seems to be relatively small and manageable, Catherine Mann’s warning from 2000 notwithstanding.
I’m not an economist or an expert on these matters. That said, from my lay vantage point, ISTM that much of what you (and others who have written similarly) say is technically true but misses the point.
Let’s say trade deficits are completely “sustainable” indefinitely. That just means that the economy can go on indefinitely with these trade deficits. But the key issue is who owns the economy. If there’s a trade deficit, then that means that foreigners own an increased percentage of the economy, whether in the form of equity or in the form of debt. That means that an increased percentage of the country’s economic output will end up in the hands of foreigners as opposed to ending up in the hands of local citizens.
So let’s suppose that goes on indefinitely. At some point 100% of the local economy - equity in companies, real estate, etc. - belongs to foreigners. All profits from local economic endeavor and local resources go to foreigners. Is that sustainable? I suppose so. (I’m not sure how you measure trade deficits when local output is owned by foreigners.) Is it desirable? I would think not. So I don’t think “sustainable” is quite the proper measure here.
Your comparison of your “severe “trade deficit” with [your] local grocery store” is a good example of this. Yes, you do have a severe trade deficit with your local grocery store. But that’s not an illustration of your claim that “nations do not function like persons”. Your severe trade deficit with your local grocery store is more than offset by your even greater trade surplus with your employer. If you add up the surplus with your employer and your deficit with all your tradespeople etc., you would hopefully balance. If you don’t, then you’re either running up debt or selling your assets, and if you keep that up long term you’re in big trouble.
As to why the current deficits exist, there can be room for multiple factors. Some say it’s American consumerism, and I assume this is correct. This is like a person who is selling or mortgaging his assets in order to spend it now. OK. That might not be smart but is within his rights. But let’s say it’s also true that certain countries are deliberately manipulating the trade situation, whether via tariffs or currency manipulation, in order to keep America in a deficit position, then that’s a problem too. And it’s worth trying to do something about.
Well, trade has been around for a long time. Can you identify any places where this has happened?
Not exactly, but the Royal Navy got into the drug trade to facilitate rebalancing a trade imbalance. When the west figured out how to trade with China, they bought tea. China demanded payment in silver. All the silver was going to China, and none was coming back; silver was getting in short supply… so the West figured out that the one thing they could sell the Chinese to recoup some of their silver was… opium from their India holdings. For some reason, the Chinese emperor did not appreciate westerners trafficking in drugs, and a war resulted where the Royal Navy forced the Chinese to open their country to opium trafficking.
Basically, if an American uses their dollars to pay for imports, then the recipient has dollars to spend. They might buy something from the USA, or use it to buy something from someone else who hopefully, will buy something from the USA. But ultimately, either there’s a whole bunch of dollars being used as money overseas (good riddance) or the money ultimately has to be spent in the USA. That means they either buy something made in the USA and the dollars come home; or they buy a piece of the USA. In the 80’s and 90’s, Arabs were buying a lot of US real estate or companies. in the 80’s, the Japanese were. Today, the Chinese are.
If too much US money leaves the country, there’s a glut and the value goes down. If everyone wants to buy US goods services or real estate, then they want dollars and will pay more for them. And so on…
But the suggestion was not that the value of the dollar would decrease - that would make sense.
The suggestion was that the foreign nation wound up owning all the assets of the nation with the trade deficit- that China, for example, would own all of Britain, which the historical record tells us did not happen and does not make any sense at all. (Instead Britain wound up conquering parts of China like Hong Kong with military force*, which is typically how a foreign nation winds up owning all the assets of another country.)
*Well, forcing China to sign extortionate treaties - same diff.
The Asian financial crisis of 1997 involved a variety of interacting trends and mistakes, and I’m not qualified to produce a synopsis. However, whether you treat it as cause or effect, current account deficits were the key symptom of the disease. “The current account in Thailand was over 6% of GDP virtually in each year in the 1990s, and approached 9% of GDP in 1995 and 1996.” Foreign capital flooded in as interest rates soared.
AGAIN: Please do not extrapolate on a comment about the Asian financial crisis to assume I am prescribing for the present-day U.S. :smack: On the question of whether Trump’s plans to reduce the trade deficit are well-advised I think I agree with the opinion of Fed Chief Jerome Powell as shown by the expression on his face a few weeks ago.
No.
The Asian Financial Crisis was an asset (principally real estate) price bubble financed by foreign direct investment.
Unsustainable valuations coupled with the US Fed increasing interest rates saw foreign capital flooding out of the region. A flight of capital made materially worse by currencies pegged to the USD as currency traders circled like vultures and won.
Concur there are negligible parallels between the causes and consequences of the AFC and the current US trade deficit.
It sounds like we agree on the “a variety of interacting trends and mistakes.” 
I assume you admit that the trade deficit, whatever caused it, was a key symptom which precipitated the crisis.
As for capital flooding in and flooding out, I’m pretty sure I win the cause-effect debate here! (Yes, as with most financial crises, panic set in and greatly compounded the damages.) When Johnstown was inundated on May 31,1889, the immediate event was associated with a very low level of water remaining behind the South Fork Dam. But I feel confident that many observers would instead point the finger of blame at the very high level of water behind that Dam on May 30!
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Assuming a spherical cow, sure. But that’s not how it works in the real world. First, while the U.S. trade deficit is large as trade deficits go, as a share of the overall U.S. economy, it’s actually quite small. In 2016, the U.S. trade deficit was about $500 billion. But the U.S. GDP in 2016 was over $18.5 trillion.
Second, economic growth is a thing. If foreigners buy ever increasing slices of the U.S. economic pie, but the size of the pie and thus the number of slices also continues to increase, the share owned by foreigners may not actually grow by much, if at all.
Finally, going back to how small the trade deficit is to the overall GDP, all of those foreigners are competing with U.S. citizens to purchase U.S. assets. Supply and demand - it’s not as if the prices of U.S. assets are completely inelastic. As foreign demand for U.S. assets increase, so will the price - but foreign demand is marginal compared to domestic demand for the same assets.
OP specifically requested an Econ 101 analysis, not a political discussion, so I’m going to steer clear of details here, but of course other countries are “deliberately manipulating the trade situation.” So is the U.S. Everyone is. I think you mean, though, that certain countries are doing so in violation of international trading rules. I personally can’t imagine that they are doing so “in order to keep America in a deficit position” per se (what would be the point of that?), but sure, countries “cheat” in order to enhance their own trade position. And sure, it’s probably worth trying to do something about it. But. It is true that there are multiple factors driving the U.S. trade deficit, and while certain countries “cheating” is almost certainly one factor, it’s a marginal one. U.S consumerism is driving our trade deficit. We spend a lot of money, and don’t save very much. The U.S. is a big, internationally active economy that buys a lot more than it saves. China is a big, internationally active economy that buys a lot less and saves a lot more. Even on a perfectly level playing field, the U.S. is going to have a large trade deficit with China.
Not the trade deficit, but the current account deficit, which is related but separate.
But take another look at your own cite. “The current account in Thailand was over 6% of GDP virtually in each year in the 1990s, and approached 9% of GDP in 1995 and 1996.” In contrast, U.S. current account deficit in 2016 was only 2.6%, and has been near that level since 2009. It had been growing in the early 2000s, and peaked at 6% of GDP in 2006, and then sharply fell.
Also, a key difference is that Thailand and other Asian economies involved in the crisis had a lot of foreign debt, much of it $US denominated. There was a lot of downward pressure on the Thai baht. The Thai government tried to defend its value in international currency markets, and spent a lot of resources doing so. They ultimately failed. As the value of the baht crashed relative to the dollar, the cost of servicing the dollar debt sky-rocketed. The same was largely true of the other countries involved in the crisis. This is the common vicious cycle for small, developing economies: $US denominated loans from the World Bank, foreign governments, and banks > widening current account deficits from overspending > drastic currency devaluation > skyrocketing costs of servicing debt > IMF bridge loans and IMF-mandated structural adjustments > severe recessions and loss of fiscal and monetary autonomy.
In stark contrast, U.S. debt, both private and public, is overwhelmingly denominated in $US. Even if chronic trade deficits ultimately cause a crash in value for the $US (which they probably wont’ - see below), that won’t directly affect the cost of servicing our debts.
Also, all of those countries hit by the Asian financial crisis, while rapidly growing, were small. When foreign investors wanted to move out of holding baht and baht-denominated assets, they had plenty of other choices, and those assets were generally small components of their portfolios. If foreign investors want to move out of holding $US and $US denominated assets, where are they going to go? The U.S. is still the world’s largest economy, and the $US is still the world’s reserve currency. As the saying goes, if you owe the bank $100 that’s your problem; if you owe the bank $100 million, that’s the bank’s problem
I would assume too that the value of assets of a country - real estate, factories, etc. - would be so much higher than the simple imbalance of trade numbers that it would take an extremely long time for the trade deficit to cover the purchase of all assets. Something would break the cycle long before the results were anywhere near 100%. As I mentioned, assorted trade surplus countries have been buying up American assets for decades, and are nowhere near a significant percentage of the US asset base. (Japan, the Middle East, now China…)
More likely, such imbalance is historical rather than recently trade-induced. Idi Amin, for example, kicked out the East Indian class because they were overwhelmingly the owners of all the enterprises not owned by the colonial power. But that wasn’t trade imbalance, it was because the Indians had the connections and jumped in while the locals were still economically illiterate. The biggest complaint was that all the profits went off to India instead of being reinvested locally.
No. I would guess that advances in transportation and shipping have made trade a much bigger portion of modern economies as compared to historical norms.
But more importantly, “indefinitely” is always theoretical. In the real world, “indefinitely” never happens. Things change. Wars, revolutions, economic upheavals, or more gradual changes. Nothing lasts forever.
The point of discussing what would happen if something lasted indefinitely is to illustrate what the ongoing impact of something is. If something is negative, then this would be illustrated by contemplating the extreme negative consequences if it were to theoretically happen indefinitely. If something is benign, then this too can be illustrated by pointing to a hypothetical scenario in which the situation persists indefinitely. But that doesn’t mean that anything actually lasts indefinitely in the real world.
Bottom line is as I wrote above. Every time you buy more than you sell - whether you’re a person or a country - then you either incur debt or you sell assets. There doesn’t seem to be any way around this. If there is, then please describe what that is.