The Electric Commentary

Friday, February 10, 2006

The Misunderstood Trade Deficit

Don Boudreax is staying on this topic, and he makes several good points:

But doesn't a higher trade deficit mean that Americans are sinking more deeply into debt? Not at all. A trade deficit isn't debt. My young son, for example, received for Christmas several Chinese-made toys. These were bought with cash. If the Chinese toymakers invest their newly earned dollars in, say, that factory in Utah, the U.S. trade deficit rises but no debt is created. Neither I nor any other American owes any foreigner anything as a result of my purchase of toys from China and the corresponding Chinese purchase of equity in a company located in America.

More generally, whenever foreigners buy American real-estate or equity, or when they simply hold dollars in their portfolios, our trade deficit rises without creating debt.

Nor is it true that a higher trade deficit means that Americans are selling off assets. Whenever, for example, IKEA builds a new store in the U.S., a new asset is created. No Americans had to part with assets as a pre-condition for this Swedish investment in America.


  • Okay yes a trade deficit isn't debt, but I think this article leaves out a couple points that I think occur.

    First, not all deficit dollars are reinvested back into the U.S. Many governments or companies simply hold these dollars. Thus some of the deficit is U.S. expenditures that are not going back into the U.S. economy.

    Second, foreigners do hold a large amount of the U.S. debt. I don't really know the implications of this.

    Third, foreigners put some money back in through investment in U.S. companies. This does help U.S. companies, but the profits are being realized by foreign, not U.S. citizens.

    Fourth, when the foreign investors have lots of money, they probably aren't building factories in Utah or Ikeas. Lots of them are using the money to invest in capital producing assets or businesses in their country. These investments involve foreign workers. These producers compete with U.S. producers. As U.S. producers profit less, the demand for the U.S. workers decreases. U.S. workers do find other jobs, but they are usually at lower wages because either they are working in retail selling foreign goods, or because only the companies that offer lower wages succeed against foreign competition. Thus the trade deficit is related to lower U.S. wages for those industries and businesses in which foreigners are utilizing the human capital of their country.

    Fifth, the investment in U.S. companies does not necessarily lead to more U.S. jobs because even U.S. companies are building their capital-creating-businesses in foreign countries to utilize foreign workers.

    Sixth, so basically what it seems has happened is that the value of labor to produce tangible goods has decreased due to foreign competition. So more U.S. workers work for less to provide services to U.S. citizens whose income has not dropped. These U.S. citizens can afford more services because the goods they buy are now cheaper. Also, those U.S. investors who are on the receiving end of the capital produced by the foreign workers have higher incomes that can buy more.

    The result, the average U.S. income as compared to inflation has fallen for the past several years. Of course, so has the price of most goods.

    I think this means that the net result is that everyone is better off, but U.S. residents are not as well off in comparision to foreign workers or the wealthiest U.S. citizens as they used to be. The problem I see is that as foreign workers continue to gain ground and compete in more areas of the workforce, the comparative value of U.S. workers (not just labor) will continue to decrease until a smaller amount of U.S. investors holds a very large amount of wealth. My guess is that what we need to do is invest in education of U.S. workers so that they can produce unique or high quality goods for which demand is high (like Germans, Japanese), thus supporting higher incomes.

    Final note. I pretty much made this all up, except what you can tell from the Boudreax article, so I might be very wrong. It would explain why deficits are great for many business types and investors, but bad for blue collar, and eventually white collar workers. The main problem with this is that the cost of some things aren't decreasing. Most notably college tuition. This may make greatly reduce economic mobility from generation to generation.

    By Blogger Scott H, at 1:31 PM  

  • I just reread my own post & I don't think my point was clear.

    Here's my point. Bordeax's column starts out:
    "America's trade deficit -- in December reaching a near-record $64.7 billion -- is unfortunate, right? Wrong. Contrary to popular opinion, this so-called "deficit" is a blessing."

    My point: I'm skeptical of his claims. I don't know economics, but I do know that what makes sense isn't usually completely senseless and I also know that people who are benefitted by something are often blind to the costs to other people.

    By Blogger Scott H, at 1:45 PM  

  • Derve, the budget deficit sucks, and the President's spending is abominable, but it has little to do with the trade deficit, which is more of a reflection of the desirability of our currency than it is of our debt.

    By Blogger PaulNoonan, at 6:57 PM  

  • You can't post anonymously on this blog anymore? You might as well secretly put invisible yellow dots on you posts. Just kidding. When it comes to the trade defecit, I predict it will all even out when we start selling spacecraft to other countries.

    By Blogger Poster #1.0, at 7:29 PM  

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