US Trade Deficit: Foreigners Are Consuming US Goods, But Consuming Them in the US (So They Don't "Count" As An Export)

Via Don Boudreaux:

Greg Ip writes that “The U.S. runs a trade deficit because it consumes more than it produces while its trading partners, collectively, do the opposite” (“How the Tax Cut President Trump Loves Will Deepen Trade Deficits He Hates,” April 19).

Here is how I like to explain why this is wrong.  The trade deficit exists in large part because foreigners are more likely to consume the American-made goods and services they buy right here in the US, rather than take them back to their home country, while US consumers tend to bring foreign goods back to America to consume them.  Let me unpack this.

First, over any reasonable length of time, payments between countries are going to balance.  If this were not true, there would be some mattress in China that has trillions of dollar bills stuffed in it, and no reasonable person nowadays just lets money sit around lying fallow.  There are some payments between countries for each others' goods.   And there are some payments for each others' services.   And there are some payments for various investments.  All these ultimately balance, which makes fixating on just one part of this circular flow, the payments for physical goods, sort of insane.  If we have a trade "deficit" in physical goods, then we must have a trade surplus in services (which we do) and in investments (which we do) to balance things out.

But what do we mean by an investment surplus?  It means that, for example, folks from China are spending more money in the US for things like real estate and buildings and equipment -- either directly or through purchases of American equity and debt securities -- than US citizens are buying in China.  But note that another name for investment is just stuff that foreigners buy in this country that stays in this country and they don't take back home.  If a Chinese citizen buys a house in Los Angeles (something that apparently happens quite a bit), that is just as much "consumption" as when I buy a TV made in China.  But unlike my TV purchase (which counts as an import), because of the arbitrary way trade statistics are calculated, selling a Chinese citizen a house in LA does not count as an export because they keep and use the house here.  Let's say one Chinese person sells 10,000 TV's to Americans, and then uses the proceeds to build a multi-million dollar house in Hawaii.  This would show up as a huge trade deficit, but there is no asymmetry of consumption or production -- Chinese and American citizens involved in this example are producing and consuming the same amounts.  The same is true when the Chinese build a manufacturing plant here.  Or when then invest capital in a company like Tesla and it builds a manufacturing plant here.

Our bizarre fixation on the trade deficit number would imply that, if trade deficits are inherently bad, then we would be better off if the Chinese person who bought the house in LA dismantled it and then shipped the material back to China.  Then it would show up as an export.  Same with the factory -- if we fixated on reducing the trade deficit then we should prefer that the Chinese buy the equipment for their factory here but have it all shipped home and built in China rather than built here.   Is this really what you want?

I am willing to concede one exception -- when Chinese use trade proceeds to buy US government debt securities.   This is where my lack of formal economics training may lead me astray, but I would say that the US government is the one major American institution that is able to consume more than it produces.  Specifically, by running enormous deficits it is able to -- year in and year out -- allow people to consume more than they produce.  Trade proceeds from foreigners that buy this debt in some sense help subsidize this.

However, I don't think one can blame trade for this situation.  Government deficits are enabled by feckless politicians who pander to the electorate in order to be re-elected, a dynamic that has little to do with trade.  I suppose one could argue that by increasing the demand for government securities, foreigners are reducing the cost of debt and thus perhaps enabling more spending, though I am not sure politicians are at all price sensitive to interest rates when they run up debt -- as a minimum their demand curve is really, really steep.   There is a relation between government borrowing and trade but the relationship is reversed -- Increased borrowing will tend, all things being equal, to increase the value of the dollar which will in turn make imports cheaper and exports more expensive, perhaps increasing the trade deficit.


  1. me:

    That is an excellent point.

    The other issue I never understood is how exactly it is bad for US workers if they can buy cheap imported electronics and see the US stock market surge year after year.

  2. Fred_Z:

    One of the most interesting stories of all vis a vis those clever orientals is the New York real estate folks selling Rockefeller Center to the all wise economic geniuses of Japan then buying it back at huge discount.

  3. Dmon:

    Yeah, all those US workers in the commercial electronics, steel and cabinet making industries should just buy stocks with their unemployment checks. Cities like Detroit and Camden are sterling examples of how easy it is for municipalities to shed their obsolete industrial pasts and transition to knowledge based economies centered on 21st century technologies like unlicensed taxi service, renting out rooms in your home and operating a fusion roach coach.

  4. John Dewey:

    When foreigners demand U.S. government securities they help keep lower the cost of all debt - not just the cost of government debt. Absent foreign demand for Treasury securities, Treasury would be forced to pay higher interest rates. Assuming the premium required to attract investors to riskier private debt remains the same, a higher risk-free rate implies higher interest expense for U.S. corporations. That should mean that foreign purchases of U.S. government debt is positive for the U.S. economy.

  5. gr8econ:

    From basic macroeconomics: (X-M) = (T-G) + (S-I)
    X-M is exports minus imports which is the trade deficit.
    T-G is net taxes minus government expenditures which is the deficit.
    S-I is savings minus investment which is the private sector balance.

    Reduce the deficit and the trade deficit will get smaller.

    Alternately you can try to increase saving or reduce investment. But those are hard to legislate.

  6. mlhouse:

    All these are excellent points, however, there is no such thing as free trade. The recent talk of "Trade War" pretends like the Chinese and other nations don't have significnatly higher trade barriers than the U.S., use all kinds of export subsididies and currency manipulations to create export sales, and particularly in the case of China, do not play fair with the concepts of trademarks, copyrights, and intellectual property.

  7. ErikTheRed:

    Exactly. What the "trade warriors" don't get is that if trade was balanced the US government would have a world-class debt crisis. They'd either have to slash spending massively (no tears from me, but it won't happen) or have the Fed directly monetize the debt even more than they do so now which would likely result in severe or hyperinflation.

    The US is very much getting a "free lunch" (in the short term), but one way or another the bill will come due. Hopefully after I'm dead.

  8. ErikTheRed:

    Wash, rinse, repeat with the Chinese. Although I strongly suspect China will have the last laugh here - they're becoming better capitalists than the Americans.

  9. ErikTheRed:

    You already have a mountain of government and Fed policies actively punishing savings because Muh Circular Flow. And then they caterwaul about people not having any money in the bank to deal with emergencies. SMH.

  10. marque2:

    Goodness, so the Chinese, buying out real assets of the US in exchange for trinkets from China is a good thing?

    They aren't buying ice cream cones, they are buying real companies and properties, and moving those assets slowly (or even quickly) over to China. This of course doesn't get counted, but when you create a computer in the US - sell the company to the Chinese, and then they start producing those same branded computers in China, you actually make the situation worse.

  11. marque2:

    I know, the cry, oh well the job taken from you was obviously unproductive, go learn computers - is the new "Let them eat cake."

  12. me:

    Uhm, right. But, to be fair, we really need to subsidize and crop up the cobblers, hoofsmiths and ice carriers first.

  13. Dan Wendlick:

    Actually, the entry-level coding of the kind that can be taught in a six-week retraining class has mostly been sent overseas. It's amazing how many of the truck drivers and factory workers who retrained into IT around the millennium have transitioned back into truck driving and factory work, areas where there are shortages of trained and experienced workers.

  14. Dan Wendlick:

    Actually, the real-estate purchases are largely being done as a hedge against a future Chinese government expropriating property. Real estate is attractive because it can't be moved via physical or digital means, and transfers of ownership can't be made without the action of the host country.

  15. marque2:

    Hence the new "Let them eat cake" = "Let them learn code." I understand it is pretty frustrating being lectured by the know better elite.

  16. Dmon:

    You're changing the subject to jobs that were replaced by technological advances, but stayed in the same geographic location. I'm talking about jobs that remained exactly the same, but were moved to a geographic location which was cheaper for the manufacturer. The overall net gain for society is zero - we pay less directly for the product, and make up the difference supporting the unemployed former worker. The key word in "me"'s original post is "worker". Cheap goods and high stock prices are good for US workers. It's all the US non-workers that might not be so happy about the deal.

  17. me:

    A good argument (and I would tend to agree that a better safety net to ease transitions such as these would be a good choice for the us)

    That said, economics hard truth is that any job that can be done cheaper, be it via technological advances or relocation is effectively already gone.

    The only real choice is to adapt and move on.

  18. hubble:

    Leftists like you just can't see solutions beyond government handouts.

    Picking yourself up out of the dirt and trying something new is part of what makes America great!

  19. bannedforselfcensorship:

    If you believe in free markets and price signals, than Chinese government artificially buying US debt to keep their currency low is not a "free lunch" for either side.

    1) Keeping interest rates artificially low can create demand for borrowing that is not always healthy. The Chinese had $800 billion of US mortgage debt. think about that. From both sides, its crazy: it meant Chinese peasant preferred to own US housing debt than a John Deere? (government forced them actually.) And it meant some Americans could buy more home than they should have. This is a bad price signal.

    2) Government can borrow more than it could normally. Remember, these aren't individual Chinese but the goverment with the goal of sterilizing surpluses. Exporters are forced to sell their dollars to the state for this purpose.

    3) Artificial currency rates create bad price signals for investors. In china, this might be a signal to invest in that marginal underwear export factory (that really should be in Vietnam but for currency being depressed.) In the USA its to not build a CNC lathe plant (can't compete againt low yuan) and instead to build a new development in Las Vegas.

    I find it very dangerous that so many free market libertarians only look at one side of this problem: the US side. Chinese consumers are people, too. And beyond that, skewed price signal are NOT healthy even though you can assign a benefit. Seriously, lower interest rates...did they "help" in 2008-2012? I'd rather not be in that position in the first place.

  20. bannedforselfcensorship:

    Every Chinese person held $800 in US housing! Amazing. What if they preferred almond roca or a tractor or a trip to Disneyland? Sorry! State decides to buy US housing.

  21. bannedforselfcensorship:

    This is good for Chinese citizens and US housing sellers. Is it good for US housing buyers?

    Now, I'm not saying ban the furriners like canada and NZ are trying.

    I'm just saying if China had a free currency market and those Chinese could buy say, foreign mutual funds instead, and hold them in China safely, that would be better. (I get why they don't.)

    But its not a "good thing" if you're a young person who wants to buy housing in Vancouver.

  22. bannedforselfcensorship:

    China has a month where they do not allow any foreign movies to show.

    Gee, if we did that...took a random month like December, and didn't allow any Chinese products to be sold, would they be upset?

    We all should want free trade. The focus should be on the offenders, not on American reaction to such offenses.

  23. marque2:

    More like I see government elite going out of th it way to.destroy American jobs using libertarian economics mumbo jumbo - which one s designed to benefit large.corporation interests.

    True conservatives aren't about special favors for the rich and elite at the cost of the every man. "Let them eat cake" indead - you represent the worst of elitism.