Educamate me on trade deficits, please!

[Fotheringay-Phipps]

@gdave

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.

I wouldn’t call that small. That’s about 2.7% of the US economy in one year. (I appreciate that for my purposes the deficit should be valued against the value of US assets, and not against economic production - which would make the number a lot smaller. But it’s still a non-negligible percentage, especially since much of US assets are not trade-able altogether.)

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.

I don’t see how this is true. Suppose by way of example, that the entire trade deficit took the form of foreign ownership of companies on the US stock market. So the first year foreigners buy X%. Next year there’s still a deficit so foreigners buy more, and now own (X+Y)%. How does the pie increasing change this? It’s not like the foreign portion of the pie is static. That initial X% is growing along with the rest of the US stock market, so the addition of Y% in Year 2 adds to the percentage, which would keep on increasing year after year.

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.

It would seem to me that as foreign demand goes up US demand would be going down. Because people in the UDS are (collectively) redirecting their resources from a demand for US assets to a demand for foreign products.

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.

Possibly “in violation of international trading rules”, but I was thinking more of “doing so more than the US, and thus giving themselves an artificial advantage”. Possibly these are essentially the same thing.

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.

That’s what I meant. I was imprecise - sorry.

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.

That’s all true. (I’m not sure if “marginal” is quite the right word, but at any rate my impression is that consumerism is a bigger factor than manipulation.)

[gdave]

@Fotheringay-Phipps

…“indefinitely” is always theoretical. In the real world, “indefinitely” never happens. Things change. Wars, revolutions, economic upheavals, or more gradual changes. Nothing lasts forever.

Agreed.

@Fotheringay-Phipps

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.

That’s…not how that works. Drinking water is benign. Continuously drinking water indefinitely is negative.

And what you are positing isn’t that the U.S. trade deficit continues at current levels indefinitely into the future; what you are positing is that the trade deficit results in foreigners owning ever increasing shares of the U.S. economy, and that if that trend continues indefinitely into the future, foreigners will eventually own 100% of U.S. assets. But, you haven’t actually shown that trend to be occurring, nor have you shown that foreign ownership of U.S. assets, short of total market dominance, is a bad thing.

@Fotheringay-Phipps

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.

That’s…not really how that works, either. National economies aren’t unitary economic actors. They’re abstractions of the aggregate activities of hundreds of millions of economic actors. If economies worked they way you’re suggesting, then shouldn’t some U.S. states have been completely taken over economically by other states by now? We’ve had a national free trade area since 1787, and inter-state trade deficits haven’t resulted in any dire consequences of which I’m aware.

[Fotheringay-Phipps]

@gdave

And what you are positing isn’t that the U.S. trade deficit continues at current levels indefinitely into the future; what you are positing is that the trade deficit results in foreigners owning ever increasing shares of the U.S. economy, and that if that trend continues indefinitely into the future, foreigners will eventually own 100% of U.S. assets.

I’ve suggested that one follows from the other.

But, you haven’t actually shown that trend to be occurring, nor have you shown that foreign ownership of U.S. assets, short of total market dominance, is a bad thing.

I don’t have numbers. Do you? What I’ve said is that a trade imbalance has to result in increased foreign ownership of either debt or equity. Do you disagree? If so, how?

That’s…not really how that works, either. National economies aren’t unitary economic actors. They’re abstractions of the aggregate activities of hundreds of millions of economic actors.

How is this relevant? There are many aggregate measures of the national economy which are thought to be relevant, and your objection would seem to apply to all of them.

If economies worked they way you’re suggesting, then shouldn’t some U.S. states have been completely taken over economically by other states by now? We’ve had a national free trade area since 1787, and inter-state trade deficits haven’t resulted in any dire consequences of which I’m aware.

Firstly, have there been consistent inter-state deficits since 1787? I don’t know. Your question seems to imply that there have been. Second, maybe there have been dire consequences for certain states. I don’t know that either. There are poorer states and richer states, and if some poorer states have much of their assets owned by people in richer states that might be a negative consequence for them. In sum, your question seems to rely on two separate premises which have not been established.

[sbunny8]

@Northern_Piper

Educamate me on trade deficits, please!

<nitpick>
I think you meant “edumacate”.
</nitpick>

… unless you purposefully misspelled a word which is itself a purposeful misspelling. Whoah. inception noise

[gdave]

@Fotheringay-Phipps

I wouldn’t call that small. That’s about 2.7% of the US economy in one year. (I appreciate that for my purposes the deficit should be valued against the value of US assets, and not against economic production - which would make the number a lot smaller. But it’s still a non-negligible percentage, especially since much of US assets are not trade-able altogether.)

Again, I Am Not An Economist, but 2.7% of the economy seems pretty marginal to me. Maybe I’m wrong and it’s more significant than I naively think.

@Fotheringay-Phipps

I don’t see how this is true. Suppose by way of example, that the entire trade deficit took the form of foreign ownership of companies on the US stock market. So the first year foreigners buy X%. Next year there’s still a deficit so foreigners buy more, and now own (X+Y)%. How does the pie increasing change this? It’s not like the foreign portion of the pie is static. That initial X% is growing along with the rest of the US stock market, so the addition of Y% in Year 2 adds to the percentage, which would keep on increasing year after year.

Honestly, I’m at the outer bounds, and probably beyond, of my understanding of economics here, so I’ll concede the point.

@Fotheringay-Phipps

It would seem to me that as foreign demand goes up US demand would be going down. Because people in the UDS are (collectively) redirecting their resources from a demand for US assets to a demand for foreign products.

To an extent, sure. But it’s not like everyone in the U.S. is spending all of their available money on big screen TVs. People are still buying houses and real estate and U.S. stocks and bonds and T-Bills and…and…and…And the trade deficit is still only 2.7% of the economy, and the laws of supply and demand still exist. U.S. domestic economic activity is still much larger than U.S. international trade activity. U.S. domestic asset markets are still dominated by U.S. citizens, corporations, and governments. And a good chunk of those assets are…I don’t know the proper economic term…growable? Stocks can be split, IPOs can be issued, and start-ups can be started. If foreigners want more U.S. assets, we can make more (to some extent, and for some asset classes, of course).

@Fotheringay-Phipps

Possibly “in violation of international trading rules”, but I was thinking more of “doing so more than the US, and thus giving themselves an artificial advantage”. Possibly these are essentially the same thing.That’s what I meant. I was imprecise - sorry.That’s all true. (I’m not sure if “marginal” is quite the right word, but at any rate my impression is that consumerism is a bigger factor than manipulation.)

Thanks. That’s much clearer. Some countries undoubtedly do this more than the U.S., but, again, the U.S. also does so. Targeting the “trade deficit”, though, is a chimera. If you want to crack down on deliberate market manipulations to give an artificial advantage, than you should try to implement more comprehensive and robust international trading regimes, like say, the TPP and TTIP…but I think that’s veering too far into the political discussion the OP wanted to avoid.

At any rate, my impression is that manipulation is, in fact, a marginal factor compared to U.S. consumerism in driving our trade deficit, and even if you regard the trade deficit as inherently bad, you really need to address U.S. savings, investment, and consumption rates, not trade policy. But, I could well be wrong. I’m certainly willing to take a look at any evidence that “unfair” trading practices by other countries are a larger-than-marginal driver of the U.S. trade deficit.

[gdave]

@Fotheringay-Phipps

I’ve suggested that one follows from the other.I don’t have numbers. Do you? What I’ve said is that a trade imbalance has to result in increased foreign ownership of either debt or equity. Do you disagree? If so, how?

How is this relevant? There are many aggregate measures of the national economy which are thought to be relevant, and your objection would seem to apply to all of them.Firstly, have there been consistent inter-state deficits since 1787? I don’t know. Your question seems to imply that there have been. Second, maybe there have been dire consequences for certain states. I don’t know that either. There are poorer states and richer states, and if some poorer states have much of their assets owned by people in richer states that might be a negative consequence for them. In sum, your question seems to rely on two separate premises which have not been established.

I’ll be honest. At this point, I’m beyond my competence and my dim memories of international economics that I studied decades ago. I don’t think you’re right, and I think I’m more-or-less agreeing with what most economists would say, but at this depth of discussion I’m frankly over my head, so I’ll sign off.

[Fotheringay-Phipps]

@gdave

And a good chunk of those assets are…I don’t know the proper economic term…growable? Stocks can be split, IPOs can be issued, and start-ups can be started. If foreigners want more U.S. assets, we can make more (to some extent, and for some asset classes, of course).

Worth noting that not all of these involve creating assets. If you split stock you’re not creating a new asset. And if you issue an IPO, you’re actually selling an asset.

Some countries undoubtedly do this more than the U.S., but, again, the U.S. also does so. Targeting the “trade deficit”, though, is a chimera. If you want to crack down on deliberate market manipulations to give an artificial advantage, than you should try to implement more comprehensive and robust international trading regimes, like say, the TPP and TTIP…but I think that’s veering too far into the political discussion the OP wanted to avoid.

At any rate, my impression is that manipulation is, in fact, a marginal factor compared to U.S. consumerism in driving our trade deficit, and even if you regard the trade deficit as inherently bad, you really need to address U.S. savings, investment, and consumption rates, not trade policy.

I’m not really disputing any of this. But it’s worth noting that consumerism and market manipulations are intertwined to an extent. Because the same tariffs and currency manipulations which favor your exports also dampen your own consumer spending. Both by making imports more expensive for your citizens, as well as by making foreign purchases of local products more viable (which pushes prices to a higher point than the local supply-and-demand dynamic would have them).

So to say “it’s not trade manipulations, it’s that Americans spend more and save less than people in other countries” is to some extent a false dichotomy, in that part of the reason Americans spend more than people in (let’s say) China, is because as a result of trade manipulation the price of goods in America encourages more consumer spending than in China.

[septimus]

@gdave

… But take another look at your own cite. …

I’m in full agreement with your entire post. But wonder why you phrased it to make it look like we were in disagreement. I wrote:
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:
Perhaps I should have used bold-face or italics on this sentence you seem to have overlooked, but I get ridiculed when I do that.

Someone asked for an example of a country which suffered from a current account deficit and I replied with a well-known recent example. There are few similarities and huge differences between the deficits of U.S.A. and the Asian bubble of the 1990’s.

(Imputing thoughts to other posters is quite common [and I’m probably as guilty as anyone [seppy apologizes ]]. Trump opposes trade deficits so if I suggest they may not be sustainable in the very long term … I get lumped with the Trumpists? :eek: Do I really need to prove my free-trade credentials? I supported the TPP which Trump, Sanders, and Changing-her-Mind Hillary all opposed.)

[gdave]

@septimus

I’m in full agreement with your entire post. But wonder why you phrased it to make it look like we were in disagreement.

I phrased it to “make it look like we were in disagreement” because we are, in fact, in disagreement. You’ve stated, multiple times, in this thread that the U.S. trade deficit i is unsustainable in the long term. I disagree. In the context of the overall discussion of this thread, I thought that you were using the Asian financial crisis as an example of why trade deficits, including the U.S. trade deficit, are unsustainable in the long term. Apparently, I mis-read your intent. I apologize.

@septimus

I wrote:
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:
Perhaps I should have used bold-face or italics on this sentence you seem to have overlooked, but I get ridiculed when I do that.

Someone asked for an example of a country which suffered from a current account deficit and I replied with a well-known recent example. There are few similarities and huge differences between the deficits of U.S.A. and the Asian bubble of the 1990’s.

wevets asked Fotheringay-Phipps for an example of a country where a long-term trade deficit resulted in 100% of the economy being owned by foreigners. You responded with the example of the Asian financial crisis. If your intent was to point out the differences between a situation where a current account imbalance was catastrophic and the current situation in the U.S., then I misread you, and, again, I apologize, and please read my post as adding to and amplifying your own, not as arguing against it.

@septimus

(Imputing thoughts to other posters is quite common [and I’m probably as guilty as anyone [seppy apologizes ]]. Trump opposes trade deficits so if I suggest they may not be sustainable in the very long term … I get lumped with the Trumpists? :eek: Do I really need to prove my free-trade credentials? I supported the TPP which Trump, Sanders, and Changing-her-Mind Hillary all opposed.)

By the same token, please don’t impute thoughts to me. I never “lumped” you “with the Trumpists”. I have no particular interest in your free-trade “credentials”, nor do I think you need to prove them.

shrug

Anyway, as I indicated in a previous response to Fotheringay-Phipps, this discussion has moved well beyond my own competence in international economics, so I have no intent of continuing it.

[Brayne_Ded]

@senoy

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.

Really? I was under the impression that there was major economic turmoil in the USA, or at the very least, it could happen very easily. For example, if the Chinese decide not to buy any more worthless paper from the Fed or whoever. Or if the dollar cease to be the world’s reserve currency and the medium for selling petroleum. Both could apply in a few years. Then what?

[Voyager]

@Brayne_Ded

Really? I was under the impression that there was major economic turmoil in the USA, or at the very least, it could happen very easily. For example, if the Chinese decide not to buy any more worthless paper from the Fed or whoever. Or if the dollar cease to be the world’s reserve currency and the medium for selling petroleum. Both could apply in a few years. Then what?

Interest rates on US debt indicate that the world does not see it as worthless. As for the dollar as reserve currency, what would be the alternative? Definitely not the Euro considering the Greek scare. China’s government and economy is not transparent enough for the yuan to serve. I can’t think of anything else that would even be close.
Not to mention that lots of powerful people have hoards of dollars, and they would be very unhappy if the value fell precipitously.

[penultima_thule]

@septimus

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.

No.

You are playing fast & loose mixing your arguments over two economic concepts i.e. balance of trade and current account. It’s been pointed out a couple of times that they are not equivalent.

Yes, Thailand’s balance of trade weakened at the time. My understanding was this largely driven by semi-conductor market exacerbated by the pegged exchange rate between SGD and USD ie volumes down and prices down.

But the cause of the AFC was an asset price bubble funded by foreign capital and consequent flight of that capital seeking sanctuary in the higher US interest rates. Not trade in goods & services. The outflow (net income deficit) would have swamped any trade account surplus.

Like gdave and others, I’m not in agreement with your assertion that trade deficits represent an inherent problem, particularly when you use anecdotes on current account deficits to bolster your argument.

[penultima_thule]

@Voyager

As for the dollar as reserve currency, what would be the alternative? …[snip] … I can’t think of anything else that would even be close.

You need to think it out again.

The world is progressively moving towards a position where a basket of global currencies for a flexible reserve.

The dollar’s days as the world’s most important currency are numbered

or

"Shift From U.S. Dollar As World Reserve Currency Underway" by...

#1: China And Japan To Use Own Currencies In Bilateral Trade
#2: The BRICS Plan To Use Own Currencies When Trading With Each Other
#3: China and Russia Use Own Currencies In Bilateral Trade
#4: Use Of Chinese Currency Growing In Africa
#5: China and United Arab Emirates To Use Own Currencies In Bilateral Trade
#6: India To Use Gold To Buy Oil From Iran
#7: Saudi Arabia Likely to Abandon Use of Petrodollar in Dealings With China
#8: The United Nations Continues to Push For A New World Reserve Currency
#9: The IMF Has Been Pushing For A New World Reserve Currency

to which I’d add
#10: Most of the rest of the world don’t see their medium-long term interests as best served by continuing to give the US largess in the currency markets.
#11: If you want to retain the status and benefits of global reserve currency then being so proliferate, isolationist and starting trade wars isn’t particularly helpful.