The US trade deficit

[Erik]

Here I want to discuss the US trade deficit.

The US trade deficit has become very large in recent years.


The main question is: what wil be the long term effects of this for the US and World?

I am convinced the US trade deficit is the biggest problem the US faces today.
Please give your opinion but keep it civilized.

[danzig]

I think as someone from the Netherlands you worry far too much about the US and what goes on here but hey thats just my opinion Our own budget deficit is more of a problem for the US trade imbalances imo.

[Erik]

The reason I am concerned is because if the US economy is destroyed (as I predict wil happen in 15 years), it wil bring the Worlds economy down with it.

My fellow countrymen own many big corporation in the US.
If they get hurt it reduces the flow of money from the US to my country.
(Yes, my country is in part to blame for the US trade deficit too).

About the budget deficit: that's a problem too, but it's realy nothing more than tax money the government still has to get from it's citizens.
So it's realy just an internal loan.

The trade deficit is a international loan: the US borrows money to import goods and one day they have to pay this money back.

There is also a flow of money into the US, but this is mainly forreigners buying American businesses (America is thus "outsourcing" it's business ownership as well as it's labour).

[Kinjiss]

Well they owe Canada several billion dollars because of their illegal tariffs on softwood lumber. So if tehy ignore NAFTA(which they do) and dont pay us back, why dont they use that monay to try and reduce the deficit?

[Peachy Carnehan]

This is what I mean:

America's Record Trade Deficit: A Symbol of Strength

by Daniel T. Griswold

The U.S. Commerce Department announced today that America's trade deficit in 2000 was the biggest in the history of the world. The difference between what Americans imported and exported last year should reach about $370 billion -- more than $100 billion larger than the previous record deficit set in 1999 and double the 1998 deficit.

Many headlines and quotes from trade skeptics will sound a familiar refrain: "Worst Year Ever for American Trade." "Trade Deficit Costs Jobs." "Trade Gap Undermines Dollar, Threatens Expansion." Should Americans worry about the trade deficit? Or is it a sign of our nation's strong economy? A $2-million federal commission on the trade deficit issued a final report in November that answered yes to both questions.

Economic theory and experience show that trade deficits are driven by levels of national saving and investment in the U.S. economy, not by allegedly unfair trade barriers abroad or by declining industrial competitiveness at home. America's record trade deficit is a symbol of economic strength, reflecting a strong net inflow of foreign investment drawn to America's dynamic economy.

Growing trade deficits signal improving economic conditions, while shrinking deficits often occur in times of economic trouble. During the last 25 years, the U.S. economy has on average grown about a percentage point faster, 3.5 percent vs. 2.6 percent, in years when the trade deficit expanded compared with years when it shrank. The unemployment rate on average fell 0.4 percentage points during years of rising deficits and rose 0.4 points when the deficit shrank. Manufacturing output rose much faster during years of rising trade deficits than during years of shrinking deficits.

America's largest trade deficits in recent decades occurred during economic expansions, its smallest deficits during recessions. It's no coincidence that as the economy shows signs of slowing down, the monthly trade deficit numbers have also begun to shrink with the economy's growth rate. (Those critics who demand that something be done to "fix" the trade deficit should be concerned that they might get what they ask for.)

Critics of trade liberalization often point to the trade deficit as proof that trade destroys jobs. If exports create jobs, they argue, then surely imports mean less domestic production and fewer jobs. In fact, imports and domestic production rise and fall together. Since 1987, manufacturing output in the United States has risen the fastest during years when the volume of imported goods has also risen the fastest. The two years of slowest import growth, 1990 and 1991, were the only two years in which manufacturing output actually fell. The same economic expansion that spurs manufacturing growth also attracts more imports and enlarges the trade deficit.

Another unfounded worry about the trade deficit is that it will saddle future generations with an unsustainable "foreign debt." It is true that foreign investors own about $1.5 trillion more in U.S.-based assets than Americans own in foreign assets abroad. But about half of foreign-owned assets in the United States are not debt but equity--direct investment in factories and real estate and portfolio investment in corporate stock. And the $1.5 trillion in net foreign investment in the United States is only about 16 percent of Gross Domestic Product, and 4 percent of the net wealth of all U.S. households and non-profit organizations. Net payments to finance our foreign "debt" were less than $20 billion in 1999, about one-fifth of one percent of GDP.

Yet another worry is that chronic trade deficits will spook foreign investors and undermine the foreign-exchange value of the U.S. dollar -- sending stock and bond markets and the real economy into a tailspin. The problem with that scenario is that it ignores the fact that trade deficits are linked to a strong, not a weak, dollar. The trade deficit increases the supply of dollars in the global economy, as foreign producers accept more dollars in payment for imports. But in times of economic expansion, the demand for those dollars by foreign investors seeking to buy U.S. assets is even greater. As long as foreign demand for U.S. assets remains strong, the dollar will remain high, and so will the trade deficit.

The best policy is to ignore the trade deficit, however large it may now seem, and concentrate on maintaining a strong and open domestic economy that welcomes foreign investment. As long as investors world-wide see the United States as a safe and profitable haven for their savings, the trade deficit will persist, and Americans will be better off because of it.

[1{H][NA]

neat article. but im confused on just one point, doesnt increasing the supply of dollars lead to inflation thus decreasing its value?

[internationalist]

neat article. but im confused on just one point, doesnt increasing the supply of dollars lead to inflation thus decreasing its value?

yes but having an inflated artificially or otherwise, currency is beneficial in that it increases exports, because products from countries with inflated currency are cheaper to buy. A slightly inflated dollar would be beneficial for the U.S export economy

[Erik]

yes but having an inflated artificially or otherwise, currency is beneficial in that it increases exports, because products from countries with inflated currency are cheaper to buy. A slightly inflated dollar would be beneficial for the U.S export economy

But inflation also means oil and other resources become more expensive for American companies.

Another effect of infaltion is that investors wil want to get rid of their dollars.
Bill Gates for example traded away most of his dollars in recent years.

[Templedog]

walmart....walmart imports....china...there...thats all we need to say...

[Empyrean]

neat article. but im confused on just one point, doesnt increasing the supply of dollars lead to inflation thus decreasing its value?

Yes, but the article refers to the increase in dollars in the global (foreign) economy, not an increase in dollars created domestically. The Federal Reserve controls the money supply, while the balance between foreign investment and the trade deficit determines how many of those dollars leave the country.

Erik views a trade deficit as a bad thing, which is a common and misguided opinion. The article Peachy quotes explains the truth of the situation quite well. He also views government debt as relatively harmless, which it is not. Government debt crowds out other forms of investment, and is essentially buying something today while paying for it tomorrow at a higher price. The higher price paid tomorrow comes in the form of taxes (which hinder the economy greatly, and impose enormous distortions if they are not collected equally from all available resources) or in the form of more bonds, which just increases the amount that will need to be paid off further down the line.

[Erik]

I would like to stress the point that a SMALL trade deficit isn't a bad thing, I am only discussing the HUGE trade deficit America has.

Ok, now for my argument:
The reason I (and many economosts with me) beleive the US trade deficit is a problem is because the US has grown dependant of the deficit.
The amount of products America sells abroad is less than the amount of raw materials they need to import to keep their economy running at the current pace.
So if the deficit suddently disappeared they could not afford enough raw materials to keep their economy running, and they would never be able to sell the same amount of products abroad.
This would lead to a vicious cycle where the US exports less and less, and can also afford to imports less and less, until the economy grinds to a virtual stop.

What Griswold says is that the deficit is good sign.
And in a way he is right because as long as the US runs a deficit their economy can keep running.
But he is forgetting that the US can only afford to run a deficit as long as money is also flowing back to the US.
And this isn't in the hands of the US but in the hands of forreign investors.

Currently many Asian investors are still willing to pump enough money into the US to keep things running.
But what if they suddently stopped doing this?
The whole US economy would fall down like a house of cards, and the investors still involved would loose a lot of money.

It's like a crazy pokergame where everybody wins until a few people quit.
Then everybody wil suddently loose money, and the losses wil get worst for th epeople still in the game with every person who quits.

Griswold says things are fine because the trade deficit shows nobody is quitting the game (yet).
But I say the HUGE deficit is a sign the system is flawed because the deficit wil only get bigger and bigger until eventually people wil get too nervous and quit the game, triggering it's collapse.

ps: It's interesting to see that most English articles are relatively positive about the US trade deficit, but most Dutch sources are very negative.
Just shows the difference in culture.

[Empyrean]

Ok, now for my argument:
The reason I (and many economosts with me) beleive the US trade deficit is a problem is because the US has grown dependant of the deficit.

If foreigners were not investing money in the United States, we wouldn't be able to import more stuff unless they were willing to hold additional dollars. The trade deficit only exists as long as people are willing to invest. You're viewing it as though it is the primary cause of other factors, when in reality it is just a measurement of them. Thermometers reading a higher temperature doesn't make the world heat up.

The "many economists with you" don't know their trade very well. The methodology of economists in general is so screwed up that you'll find a group of them that will support any position.

The amount of products America sells abroad is less than the amount of raw materials they need to import to keep their economy running at the current pace.

No kidding? Maybe that's because we don't export everything we make here. Duh.

So if the deficit suddently disappeared they could not afford enough raw materials to keep their economy running, and they would never be able to sell the same amount of products abroad.

And what would make the deficit disappear? An increase in the amount of products sold abroad. Either that or a reduction in foreign investment in the United States, which leaves other countries with more dollars to spend on products imported from the United States. This is not complicated, unless you view the trade deficit as the cause rather than the measurement of international economic activity.

This would lead to a vicious cycle where the US exports less and less, and can also afford to imports less and less, until the economy grinds to a virtual stop.

The sky is falling! The sky is falling! See the above posts for a brief explaination of why your theory is pure :wub: to begin with.

What Griswold says is that the deficit is good sign.
And in a way he is right because as long as the US runs a deficit their economy can keep running.

False. You've got this delusion that only the trade deficit keeps the economy running. Not true. If we weren't spending dollars on foreign products, while foreigners were spending those dollars to invest in the United States, we could keep on going almost as well by investing in our own businesses and domestic products instead. This would produce a drop in the standard of living because trade allows for greater specialization and productive capacity, but our economy would not grind to a halt.

But he is forgetting that the US can only afford to run a deficit as long as money is also flowing back to the US.
And this isn't in the hands of the US but in the hands of forreign investors.

And you are forgetting that products only flow into the US as long as foreigners are willing to accept dollars for them. If that stops, we revert back to being self-sufficient and everyone loses the benefits of trade. That does not mean the economy goes into a spiral towards oblivion.

Currently many Asian investors are still willing to pump enough money into the US to keep things running.
But what if they suddently stopped doing this?

OH NOES! What if they stopped buying stuff from us, choosing instead to keep their dollars? Well... we'd keep on buying stuff from them without having to give any products or investments back. That's what spending money is... it's how you make your claim on present goods after having given up something of your own in the past. They'd accumulate a pile of money, and we'd get stuff from them without having to give them anything back. Might as well ask what would happen if someone worked for a paycheck and never spent it. They add to the productive output without taking anything in return, and that is not a problem.

The whole US economy would fall down like a house of cards, and the investors still involved would loose a lot of money.

It's like a crazy pokergame where everybody wins until a few people quit.
Then everybody wil suddently loose money, and the losses wil get worst for th epeople still in the game with every person who quits.

You have absolutely no idea what you're talking about. See the above paragraphs for an explaination of why your fear of trade deficits is unfounded.

Griswold says things are fine because the trade deficit shows nobody is quitting the game (yet).
But I say the HUGE deficit is a sign the system is flawed because the deficit wil only get bigger and bigger until eventually people wil get too nervous and quit the game, triggering it's collapse.

Are investments in the United States not paying off? That is why people invest their money here. Nobody's going to "get nervous and quit" because the United States is a great place to invest money. If that ceased to be the case, the decline in investment would not cause the US economy to implode. The decrease in available capital drives the rate of return on capital invested higher, prompting more investment to bring things back towards equilibrium. If for some reason there were real declines in the productivity of investments in the United States so that people stopped investing here or accepting dollars, the demand we have for foreign goods would be shifted over to demand for domestic goods. We'd restructure ourselves to be more self-sufficient and everyone would lose a bit due to the decreased trade, but the economy would move on.

It's interesting to see that most English articles are relatively positive about the US trade deficit, but most Dutch sources are very negative.
Just shows the difference in culture.

Just shows that you've got some crappy economists writing articles in the Netherlands. You rely more on exporting goods and then investing in foreign economies with their own currency, rather than importing goods while foreign investors cycle the money back into your own country in the form of investment. You are just as vulnerable to people stopping the purchase of your export goods as the United States is to people stopping their investment of dollars in the United States. That is to say, it is not a problem.

yes but having an inflated artificially or otherwise, currency is beneficial in that it increases exports, because products from countries with inflated currency are cheaper to buy.

It is a common fallacy that that is a good thing. You sell more goods when your stuff is artificially reduced in price. That makes all imports more expensive, so you have to produce more goods domestically to trade for fewer foreign produced goods.

A slightly inflated dollar would be beneficial for the U.S export economy

And bad for the economy as a whole. Of course offering more stuff for less return will get more people willing to do business with us, but the cost of giving stuff away for cheap is that we're giving stuff away for cheap. Don't look at the strength of an export economy by how much you can sell, look at how much you can get in exchange for what you sell. A weak currency is a bad thing.

[Erik]

See the above posts for a brief explaination of why your theory is pure :wub: to begin with.

You don't have to rant, I would prefer to discuss economics in a civilized way.
But you seem to be overly nationalistic, and unable to explain your arguments in clear way.

I think the center of the argument is that you beleive everything wil balance out by itself, and I beleive things have gotten into a situation where it it won't balance out by itself anymore.

Would you like to discuss this part of the argument?
Or would you prefer to simply throw some mud?

[Erik]

Ok, I wil point out some thing I disagree on, but you should realy make a clear post stating what you mean in stead of short follow-ups about how all I say is bull. (pointed to things you already said doesn't make your case clear at all).

And you are forgetting that products only flow into the US as long as foreigners are willing to accept dollars for them. If that stops, we revert back to being self-sufficient and everyone loses the benefits of trade. That does not mean the economy goes into a spiral towards oblivion.

Self sufficient means the US can't import oil and other basic resources.
I doubt the US economy can keep running entirely on it's own, without importing natural resources.

OH NOES! What if they stopped buying stuff from us, choosing instead to keep their dollars?

KEEP their dollars?
If things go bad people wil want to LOOSE their dollars, not keep them.
There would be big inflation caused by investors exchanging dollars for other currencies.
This wil make imports (like oil) more expensive for Americans, while they get less for their exports.

Might as well ask what would happen if someone worked for a paycheck and never spent it. They add to the productive output without taking anything in return, and that is not a problem.

Your comparison is a good one but in the case of America this person spends far more than his paycheck, and that's the problem.
This "person" has been getting mortgages on his house and cars, and he is maxing out his credit cards.

You say he has a healty income because the fact he can spend a lot tells you he is doing fine.
But I think he should spend less because soon there won;t be any mor ecredit card companies willing to give him new loans, and he would have a mortgage on everything he owns.
His paycheck doesn't cover much more than the interests on his mortgages, and THIS is why I think he has a unhealthy spending habit.

Nobody's going to "get nervous and quit" because the United States is a great place to invest money. If that ceased to be the case, the decline in investment would not cause the US economy to implode. The decrease in available capital drives the rate of return on capital invested higher, prompting more investment to bring things back towards equilibrium.

Here is one of your classic circle arguments.

You beleive the US economy wil do fine, therefore people wil keep investing so the US economy wil do fine.

But what IF the US economy gets into a slum (I know, hard to imagine)?
In that case investors won't be able to make money, and they wil invest elsewhere, I have heared China is a great new market.
The lack of investments means the US can't afford to import the raw metarials it needs.
And this would mean the economy wil go further down, and investors wil loose even more money.

What if your "everything wil always get back to equilibrium" theory doesn't always hold?
It didn't during the great depression, remember?

And you should realy take inflation into account.
Inflation means a smaller return for forreign investors.
Let's say an investment makes 4% profit per year and the US inflation is 1% higher than the local inflation.
Then it would realy just make 3% profit in local currency.

If, becasue investors top investing in the US, the US inflation becomes 5% higher than the local inflation, then this investment would actually loose the forreign investor money.
So he wil also step out, making the inflation even higher.

If for some reason there were real declines in the productivity of investments in the United States so that people stopped investing here or accepting dollars, the demand we have for foreign goods would be shifted over to demand for domestic goods. We'd restructure ourselves to be more self-sufficient and everyone would lose a bit due to the decreased trade, but the economy would move on.

Shift entirely to domestic oil?

Just shows that you've got some crappy economists writing articles in the Netherlands. You rely more on exporting goods and then investing in foreign economies with their own currency, rather than importing goods while foreign investors cycle the money back into your own country in the form of investment. You are just as vulnerable to people stopping the purchase of your export goods as the United States is to people stopping their investment of dollars in the United States. That is to say, it is not a problem.

But the Netherlands doesn't borrow money, so when peopele stop buying our stuff we don't have to worry about paying interests from loans.
And our previous investments wil still make us money even if we don't produce anything ourselves.
Remember WE own YOUR companies.
As long as America is making money we are making money.

[Kanaric]

just look at it this way, our whole country is ****ed yet somehow things are still running.

[Empyrean]

Erik, of all the things I wrote you chose to focus on the negative. I can understand mentioning it, but ignoring the actual arguments all together isn't going to fix anything.

I already explained why your scenario is impossible. Your turn to reply.

[Big War Bird]

If things go bad people wil want to LOOSE their dollars, not keep them.

Ultimately, there is only one way for dollars held by foreigners to gotten rid of, and that is buy american goods (including equities) and services. This action would have a two fold effect. The desire and act of 'getting rid of' dollars would drive the exchange rate of the dollar lower (which imo is somewhat overdue, thanks to Japanese and Chinese interference in the exchange market) making imported goods to the USA more expense for americans, and exported goods from america to others cheaper for them. These market forces would blance out the American trade deficit in the long term.

Least you fret that america cannot afford to import the raw materials she needs to keep going, here is a statistic I recall from my econ studies, though somewhat dated, the USA was 94% self sufficient in 1996 IIRC. This meant that on a small fraction of all the imputs to the US economy had to be sourced from foreign lands. So the US ecomony would be quite reslient to any rapid currency fluctuation, much more so than any other nation would be.

What if your "everything wil always get back to equilibrium" theory doesn't always hold?
It didn't during the great depression, remember?

Actually it did get back to normal. If you would look around a bit, you will discover that the Great Depression has been over for a while now.

@Lord Emporer Kinjiss

Well they owe Canada several billion dollars because of their illegal tariffs on softwood lumber. So if tehy ignore NAFTA(which they do) and dont pay us back, why dont they use that monay to try and reduce the deficit?

Canada's subsidies to its lumber industry is illegal under the WTO treaty we signed, and the WTO says the tariff is perfectly fair considering Canada's subsidy, so stick your NAFTA complaint where the sun don't shine.

Back at Erik

In stead of fretting, why don't you try to figure out a way to take advantage of the situation? You can start hedging by using your dollars to buy other currencies, like the chinese yuan, which is currently pegged to the dollar, but is now the the subject of a WTO complaint by the USA. That action is likely to result in at least some free up of the that currencies value, which is likely to go higher.

I know I'm hedging.

[ApathyEcstasy]

Ultimately, there is only one way for dollars held by foreigners to gotten rid of, and that is buy american goods (including equities) and services. This action would have a two fold effect. The desire and act of 'getting rid of' dollars would drive the exchange rate of the dollar lower (which imo is somewhat overdue, thanks to Japanese and Chinese interference in the exchange market) making imported goods to the USA more expense for americans, and exported goods from america to others cheaper for them. These market forces would blance out the American trade deficit in the long term.

Least you fret that america cannot afford to import the raw materials she needs to keep going, here is a statistic I recall from my econ studies, though somewhat dated, the USA was 94% self sufficient in 1996 IIRC. This meant that on a small fraction of all the imputs to the US economy had to be sourced from foreign lands. So the US ecomony would be quite reslient to any rapid currency fluctuation, much more so than any other nation would be.



Actually it did get back to normal. If you would look around a bit, you will discover that the Great Depression has been over for a while now.

@Lord Emporer Kinjiss



Canada's subsidies to its lumber industry is illegal under the WTO treaty we signed, and the WTO says the tariff is perfectly fair considering Canada's subsidy, so stick your NAFTA complaint where the sun don't shine.

Back at Erik

In stead of fretting, why don't you try to figure out a way to take advantage of the situation? You can start hedging by using your dollars to buy other currencies, like the chinese yuan, which is currently pegged to the dollar, but is now the the subject of a WTO complaint by the USA. That action is likely to result in at least some free up of the that currencies value, which is likely to go higher.

I know I'm hedging.

the yuan was unpegged months ago and now rides on a basket of currencies rather than just 1

[Big War Bird]

the yuan was unpegged months ago and now rides on a basket of currencies rather than just 1

Beware the advice of successful people, they do not seek company. :wink:

[ApathyEcstasy]

Beware the advice of successful people, they do not seek company. :wink:

what do you mean