The Trade Deficit is Not A Debt
If you search Coyoteblog for the title of this post, you will see a number of others with the same title. It seems to be a theme we keep having to come back to. Here is one example of where I tried to explain why the trade deficit is not a debt.
Take the Chinese for example. One thing that people often miss is that the Chinese buy a LOT more American stuff than the trade numbers portray. The numbers in the balance of trade accounts include only products the Chinese buy from the US and then take back to China to consume there. But the Chinese like to buy American stuff and consume it here, in the US. They buy land and materials to build factories and trade offices. They buy houses in California. They buy our government bonds. None of this stuff shows up in the trade numbers. Is it somehow worse that the Chinese wish to consume their American products in America? No. How could it be. In fact, its a compliment. They know that our country is, long-term, a safer and more reliable place to own and hold on to things of value than their own country.
Dollars paid to a Chinese manufacturer have to get recycled to the US -- they don't just build up in a pile. If I am a construction contractor in LA and build that manufacturer a new office or a local home and get paid with those recycled dollars, I am effectively exporting to the Chinese, only the goods and services I sold them never leave the country and so don't show up in the trade numbers. So what does this mean? In my mind, it means that the trade deficit number is a stupid metric to obsess over.
Another way I think about it is to observe that the US is winning the battle of stuff. Money as money itself does not improve my well-being -- only the stuff (goods and services) I can purchase with it can do so. So i t turns out that other countries ship far more stuff to the US than we ship out. And then these folks in other countries take the money they earn from this trade and buy more stuff in the US and keep keep that stuff here!
I am reminded of all this because several other folks are taking a swing at trying to make this point to the economically illiterate. Don Boudreaux does so here, and Dan Ikensan here. And here is Walter Williams as well.
Fred_Z:
I agree completely with the thrust of your article but have one quibble.
Sometimes dollars paid to a Chinese do not get recycled to the US and they do just build up in a pile. And that is as good or better than recycling them. Americans get the Chinese stuff exported by China and imported by the USA and the Chinese get paper, or a few accounting entries at a bank. Two results: America as a whole got something for nothing, and the pile of money can only ever be spent in the USA, and that is true even if the money is traded to someone else.
Coyote pointed out that the USA is a world leader in everything, including devaluing its own currency. So long as the Chinese hold that pile of money, they are having it devalued daily.
March 24, 2016, 11:52 amTruthisaPeskyThing:
One big oversight in your analysis: Yes, the funds do come back to the U.S. to buy American stuff. But what they are buying are assets, income-producing assets. A future flow of income will accrue to foreign owners of these assets, not to Americans. That is the cost of trade deficits, the practice where we consume more of another's products than they consume of ours. It has a long-term cost!
March 24, 2016, 12:20 pmOne interesting feature of this practice from a few years ago: With the trade deficit with China, China had funds to buy U.S. Treasuries; they bought assets, and these assets in essence are loans to the U.S. Government. These short term loans typically cost the U.S. Government less than 1% interest. The U.S. government then used these funds to invest preferred stock in Banks. Banks did not have a choice; they had to take the government money and sell preferred stock to the government which guaranteed a rate of return of 6%. Plus the banks had to pay penalties and fees if they ever wanted to buy back the preferred stock. This was a great money-making deal for the government.
GoneWithTheWind:
So if we send our money to China buying their junk and they come back here and buy our land houses and factories you think this is good and somehow all evens out??? I would be in favor of not allowing anyone but a U.S. citizen to actually own land or companies in the U.S. I am also in favor of a law that requires all non-U.S. citizens to spend no more than 180 days in the U.S. out of 365 consecutive days, no exceptions. Come visit (with a visa) and go home.
March 24, 2016, 5:31 pmIncunabulum:
If you think that what they're selling us is 'junk', they why are you buying it? *somebody* thinks the stuff they're selling is worth the little pieces of paper that they have to give in exchange - just like they do for *everything else.
Look at it this way - all my local hardware store sells me is junk and then they take my money. They never 'buy' anything from me (except little pieces of green paper) and they're using that money to buy the building their in and the owner has used that money to buy a house. I'm running a trade deficit with all of my local businesses!
March 24, 2016, 8:43 pmIncunabulum:
But there is NO SUCH THING AS 'Americans'. There are *individuals* involved here, not collectives. An American citizen (and business owner) will exchange a short term money gain for a long-term income stream. The only difference is *who's doing the reciprocal*.
Its OK to sell your business or land to another American citizen but not to a Chinese one? What about a guy from a different state? Where is the immutable line that separates 'us' from 'them'.
For you it may be the national border - but you can't actually make a consistent, *principled* defense of free-trade on one side of that line and heavily restricted trade on the other.
March 24, 2016, 8:47 pmFred_Z:
Said he, typing is comments on a 'junk' computer made entirely in China or with mostly Chinese parts.
I just bought, in Canada, Saloman (French. Jewish I guess) ski boots made in Hungary using money I earned from American investment (Yankee go home!!) in the Canadian economy.
By which I mean, you might want to study economics and have a read of a gent named David Ricardo.
March 24, 2016, 9:35 pmroystgnr:
The "pile" that dollars build up in is more commonly called a "reserve currency", and there are trillions of dollars of it at the moment. Usually they're not held as literal dollars, rather as treasury securities payable in dollars, but unless we're going to default that's six of one and a half dozen of the other.
March 25, 2016, 9:05 amTruthisaPeskyThing:
I believe I understand your point, and to some degree I agree with it. I would not want government restrictions on who I can sell land to. However, I believe there is an issue when the CULTURE says "consume without worry about whether we are earning enough to pay for it." When our culture becomes one of consumption, and because of it the economy has fewer income-producing assets, then even if I can make out okay while short-sighted fellow citizens suffer in the long run, I will still be ask to pick up their slack in funding needed programs. So, Incunabulum, I do not call for government restrictions, but I do advocate for a wiser culture.
March 25, 2016, 4:50 pmTruthisaPeskyThing:
GoneWithTheWind, would you be in favor of Denmark and Panama passing laws that says that Americans cannot buy land or assets in those countries?
March 25, 2016, 4:51 pmGoneWithTheWind:
Sure, why not?
March 25, 2016, 6:52 pmGoneWithTheWind:
I have an MBA I have studied economics.
March 25, 2016, 6:54 pmGoneWithTheWInd:
You are running a trade deficit with your local business. You probably work for a business that if not 'local' is American. So the money moves around within the country. If we all only bought foreign goods there would be no American businesses for you to work at and you would not be able to buy from your local businesses. The trade deficit is a true debt. It is the reason we officially got off the gold standard. Other countries actually demanded payment of those debts in gold. Because we have a completely fiat money system that it doesn't appear that the debt/deficit is real. But it is and the day of reckoning is coming.
March 25, 2016, 7:01 pmGoneWithTheWind:
In California there are farms owned by Japanese companies. They pay a small property tax (small because it is farmland and subject to lesser tax than an equal value building). They grow produce which they export to Japan. They pay no wages in this country, no payroll taxes are withheld. They pay no taxes what so ever the produce is simply loaded in containers and sent to Japan. If there were a farm right next to them owned by an American they would pay all the taxes any business would have to pay, the taxes that the Japanese owned farm doesn't pay.
March 25, 2016, 7:12 pmIncunsbulum:
So the money moves around inside the United States. Why is *that* one border important but not the one around my city, county, or state?
Also, sometimes it moves outside the United States also - I'm running a
pretty decent trade deficit with Mexico also. For example most of my
medical, dental, and mechanic work is done across the border. How am I
screwing myself by getting the same quality work at almost half the
price by crossing an invisible line in the sand?
And somehow, SOMEHOW, I end up with more money in my pocket, more goods and services, than if I had spent that money only in my town. In fact, if I restricted myself to only what my locality produces I would eat a lot of citrus and lettuce and not much else. No cars, internet, movies, clothes, nothing.
"If I only bought from outside the US then there would be no US businesses to pay me . . . "
wat? Seriously. You have an MBA. Either I'm going to make enough money working for a foreign company to afford those foreign made products or there's no reason to trade with me. right? So then American businesses spring back into existence to fill that gap.
Its like complaining about a natural monopoly - which is only a monopoly as long as it keeps costs down and service up. As soon as it raises costs (to take advantage of its monopoly position) it opens up a niche for a competitor.
March 25, 2016, 9:17 pmIncunabulum:
Which is a completely separate issue that has no relation to whether or not a trade deficit if good, bad, or irrelevant.
Let's face facts - we *do* produce. A lot. An incredible amount. Just not physical goods. And that's what is measured in the trade deficit. Its an obsolete metric. These guys are literally frothing over how many tons of tractors are being reported.
March 25, 2016, 9:21 pmIncunabulum:
No, that does not happen.
You do not employ workers in the US, even Japanese nationals, without paying payroll taxes. JNs, like Americans, are taxed on their foreign earnings and have to report them. The only way they can get out of paying US taxes is if their Japanese tax bill is equal or higher - and for the US to receive no income taxes from them would mean that they somehow got *thousands* of low-skill visas along with Green Cards and residency permits. The one particular visa type that is not only issued in the smallest numbers but has a *worldwide* limit of something like 17,000/yr.
You don't get to export things from the US for free. There are export taxes. Try to take a used washer and dryer across the border and see how far you get. Hell, NASA had to pay export taxes on a diamond window for a Venus probe in 1979.
March 25, 2016, 9:27 pmGoneWithTheWind:
The people who work there are owner operators and don't employ anyone. They ship their fruit to Japan they do not 'sell' it here.
March 27, 2016, 7:54 pmGoneWithTheWind:
Your post was a little disjointed so I'm guessing your point is borders don't matter and jobs shipped overseas really don't hurt us. I'm not really sure you can make that argument. The trade deficit is real, the jobs lost are real. You can ignore reality but you cannot ignore the results of ignoring reality.
If you put people out of work or bankrupt companies it is little comfort that after it all crashes that "American businesses spring back into existence to fill that gap.".
March 27, 2016, 8:01 pm