Please explain trade deficits to me. I don’t understand how they even exist.
If I google it, I get, “A trade deficit occurs when a country’s imports exceed its exports, meaning it buys more goods and services from other countries than it sells to them.”
Let’s assume Apple buys twenty million iPhones from China for one billion dollars. If China decides to use ten million $100 bills for wallpaper, that’s great. The mint can always print more. If China uses that money to buy French wine, German beer, Arabian Oil, or South African gold, that’s great. As long as the dollars stay out of the United States, we have twenty million iPhones and the mint can just print more paper $100 bills. I assume this does not happen in the long run.
Obviously, those dollars MUST come back to the USA eventually and buy American products at some point. While the USA may have a trade deficit with respect to China, they must (???) have an equivalent surplus with other countries. So how can a trade deficit exist in the long run? What am I missing?
In essence, your analysis is correct. If country A runs a trade deficit towards country B, that means that country A’s net position towards B deteriorates: Either debt owed by B to A is reduced, or debt owed by A to B increases (balances in A’s currency that B holds constitute a claim of B’s economy against A’s, more precisely A’s issuing central bank, and hence debt owed by A to B). The thing continues as long as B is happy to be paid with what is essentially an I.O.U. underwritten by A. The United States has been getting away with that for a very long time because the dollar still is the primary currency in which international transactions (even those not involving the USA) are conducted and foreign reserves are held; so there is a lot of demand for dollars, which means the rest of the world is still happy to receive dollars in exchange for goods.
A trade deficit can’t be maintained indefinitely… but that’s no reason to hasten the crash by imposing a bunch of stupid tariffs. What you actually want to do is to figure out how to end the deficit gently, with a soft landing.
A country running a trade deficit with the entire rest of the world can’t continue that indefinitely. Due to rising debt.
But Country A can run a perpetual trade deficit with Country B as long as there are other trading partners around such that A runs a surplus with C, D, & E.
It’s also important to remember that the governments of countries aren’t generally the ones involved in creating a trade deficit or a trade surplus.
It’s the businesses who create it, through a series of individual transactions that cumulatively create a deficit or a surplus.
For example, the US has been running a trade deficit with Canada. If you start picking it apart, by transactions, you find that the cause of the deficit is that American oil refineries buy a lot of heavy Alberta oil. If you take oil out of the equation and look at other natural resources and consumer products, there would be a US trade surplus with Canada.
But that highlights how limited a government’s powers are in this area. A government in a liberal democratic economy relies on the decisions of all those businesses to decide how the economy functions. Unless the US government starts regulating directly how much Canadian oil is bought by US refineries, that trend will continue.
And the Canadian government doesn’t have the power to tell Canadian businesses to buy more stuff from the US, or tell Canadian consumers to buy more US stuff.
Tariffs might have some impact, but they’re very crude.
Ultimately, Trump is upset about the way free markets work, internationally. But that’s how the US has reached its position of economic dominance - by relying on free enterprise.
Trump wants to kneecap the US economy.
There’s also a vocabulary issue. For accountants and economists, “surplus” and “deficit” are neutral accounting terms. Whether a particular surplus or deficit is good or bad for a nation’s economy will depend on a number of factors.
But the common sense is that “Surplus” is good, and “deficit” is bad.
As the saying goes, you run a trade deficit with your doctor. What do you ever buy from them?
International trade has been going on since forever. Some areas have minerals that others don’t. Some have spices that others don’t. A place that has a lot of gold can buy a lot of peppercorns. Doesn’t matter if the place with spices keeps all the gold or uses it to buy silk from another nation. All sides have made deals to their liking.
Also important to note is that goods aren’t the only international trade. Services are also bought and sold. In ancient times mercenary armies were purchased. That’s a service, not a good. When services are added in, trade surpluses and deficits look very different.
Extreme surpluses and deficits can be problems. Investopedia has a straightforward article on possible consequences. Nevertheless, neither are inherently bad in all cases.
I think a given government can do more with subsidies. We saw this with steel production. China heavily subsidized steel production and it simply became cheaper to buy Chinese steel than US steel. Eventually they run US steel corporations out of business. We saw this with flat panel displays where other countries would sell panels at a loss until local producers could not compete.
In theory, the US could impose tariffs on those products but US consumers and businesses liked the artificially low prices.
Another thing to remember is a trade deficit is not the same as a balance of payments deficit. Foreigners ca also purchase services. A big component is tuition paid paid by foreign students.
The US last had a trade surplus in 1975. How is this possible?
We import goods and services more than we export export goods and services. In return, foreigners buy more of our bonds (and stocks and real estate) than we buy of theirs. Put in another way, the trade deficit is equal to the gap between domestic savings and domestic investment.
So tariffs won’t necessarily improve the trade deficit. To do that we need to do some combination of higher savings (== lower consumption / lower federal budget deficits) or lower investment (less spending on cars, houses, factories, office buildings, machinery, etc). Quick drops in investment occur during recessions.
To the extent that tariffs do reduce the trade deficit, it will be through reducing US consumption.
National debt is an odd thing. It seems to be phantom money, in that nobody really expects it will ever be ‘repaid’?
Maybe it will eventually be whittled away by inflation, which is probably why the Fed and other national banks like to see a small positive inflation rate.
Though much of the entire world financial system seems to be a mutually agreed fiction in which so much has been invested everywhere that nobody is willing to say that the emperor has no clothes?
If the economy keeps growing, then growing debt that is a constant fraction of the economy isn’t a problem either. And that has nothing to do with inflation, currency differences, etc.
Where it gets dicey eventually is where all-causes debt gets to be an ever growing fraction of total economic output. Something gonna give sometime if that keeps on keepin’ on. But eventually might be a hundred years after we’re all gone.
US steel manufacturers share in the blame. When I was taking metallurgy class back in the late 70s we toured the Bethlehem Steel plant. The handwriting was on the wall already, but the professor put much of the blame on the resistance of Steel to invest in streamlining and modernizing their plants. The Bethlehem plant was exhibit A - the plant had grown haphazardly over the decades so that the flow from raw material to finished product involved moving tons of material back and forth between locations in the plant - lots of rail cars moving back and forth along the 2-3 miles of plant. The priority was to maintain stock price and dividends, so investment was limited.
But the other side of that is that, eventually, the economy stops growing. Or at least, the growth slows. Exponential growth is never sustainable indefinitely.
Yeah, I wanted to chime in and say this. You can have debt indefinitely without it being paid off, provided it isn’t growing faster than your ability to pay it. Similarly companies carry debt on their balance sheets with no plans of every paying it off, and it’s not a problem.
Let me offer another framework. Debt crises are a thing. They have indicators. If you are concerned about the US running into a debt crisis, study debt crises. We’ve had them for hundreds of years.
Part of GDP growth - a large part of it - is putting together matter in ever cleverer and more convenient ways. I see no limits to that sort of growth. As an example, laptops have gotten lighter over time - lower mass. They’ve also grown more capable. No contradiction there.
I’m not a fan of Limits to Growth - it’s essentially an economic model without economics (i.e. there’s no substitution among inputs). Its predictions have been terrible, and terrible predictions were anticipated by economists when it was first released. Its author has engaged in revisionism since, saying that he was concerned that we would run out of environment (as opposed to metals, etc). Ok, that’s a big concern of mine, but the original model didn’t help with that problem. Nor did the revised version a decade or so later.
No, national debt is paid off all the time, continuously. Governments sell bonds on the bond market. When those bonds mature, they are paid off. Now granted, the money used to pay off the old bond quite likely comes from the sale of a new one, but that doesn’t mean the debt isn’t being repaid. If you lend the federal government by making purchases in the bond market, you’ll get your money back with interest.
It is true that nobody really expects national debts to be paid down to nothing. Partly because the austerity required to do so would be extremely politically unpopular, and partly because it wouldn’t actually be smart. Governments can borrow money at extremely low rates, often near or even below inflation, and then, if they’re not morons, use that money to do things that promote the public good, like investing in infrastructure. Rather than saving up to buy a critical new bridge somewhere, it’s the smarter play to borrow the money to build now when you can do so at super low interest rates.