Why Trade Deficits Matter

America’s trade deficit is a considerable problem, one that even globalist newspapers and magazines are worrying about. Unfortunately, it is a subject liable to deliberate confusion by those who wish to ignore it, simply because most people don't quite understand what it is, or why it matters, even though they intuitively sense that something is wrong when we have one. So it is worth thinking through its fundamentals with care, because once one truly grasps them, one will understand why it’s a problem and be immune to the deliberately-confusing arguments spewed out by globalists who want cover it up. Following the logic below, step-by-step, should do this.

1. Nations engage in trade with one another. This means Americans sell people of other nations goods, and buy goods from them.

2. You don't get goods for free in this world. So when we buy goods from foreign nations, we have to give them something in return.

Other nations aren't Santa Claus, so they won't give us their goods if we don't do one of these things. Why should they?

b. is when they sell us Sony televisions and we sell them office buildings in New York.

c. is when they sell us Sony televisions and we go into debt to them to get the money to pay for them.

In case you haven't guessed already, 4b. and 4c. are what happens when we have a trade deficit. This is because we are not covering the cost of our imports with the value of own exports, so we have to make up the gap with something else that has value to our foreign trading partners. Borrowed money will do. So will a share of our existing assets.

For a start, because they're unsustainable: they can't go on forever. In case 4b, we have only so many existing assets we can sell off to foreigners. In case 4c, we can only pile up so much debt before we can’t afford to meet the interest payments.

On the other hand, in case 4a, we can go on producing goods, and exchanging them for whatever we want from abroad, indefinitely. That's why it's good to be a nation with strong exports, like Germany or Japan. They can not only obtain anything they want that foreigners have to sell, they can count of being able to do so forever – or at least as long as they remain strong exporters.

In case 4a, when we were selling jumbo jets in return, this meant we had to employ people to produce these jets, and we could afford to do because the foreign sale brought in money to pay the workers.

But in case 4b, the office building has already been produced, so no jobs today are created by selling it to some foreigner. The foreigner is just as happy to become the proud owner of a $500,000,000 office building in New York as he would have been to get $500,000,000 in jumbo jets, but we don’t get any jobs out of it. In essence, we’re cannibalizing our past production of goods to pay for present consumption. We have 200 years of American wealth accumulation to live off of.

In case 4c, while it is true that jobs will have to be created to produce goods at some time in the future to pay back the debt, these are jobs whose wages must be paid by us, not by foreigners, as the foreigners already gave us the goods, back when we bought from them on credit, so they don't owe us any more anything. So in essence, we must produce goods without getting paid! This is what it means to work off a debt, be it individual, or aggregate to the American economy as a whole.

In fact, this is what heavily-indebted Third World countries, laboring under debts piled up by past dictators, are always complaining about. This is why the far left thinks international debts are a new form of colonialism, designed to extract labour from the Third World without the bother of running an old-fashioned empire, and why they hate the International Monetary Fund, which administers a lot of these debts.

Therefore, if 4b. or 4c. are happening, America is either b) gradually being sold off to foreign owners, or c) sinking into debt to foreigners. Either way, we are, as we own less, and owe more. Either way, it reduces our future wealth and our future standard of living. It burdens future generations to increase the consumption of this one.

The fact that this may be a free-market outcome does not make it OK, pace laissez-faire ideologues. Free markets contain both rich and poor people, winners and losers, people who own huge assets and people burdened by huge debts. The free market does not guarantee Americans a place among the former.

Principles 1-4 are the basic facts. Now, if you’ve understood them to your satisfaction and grasp why they have to be true, let’s add three minor wrinkles that don’t change the logic, but make our analysis a little more precise:

5. Money is the medium by which trade is carried out, but because money is only valuable because one can buy goods with it, we can ignore money as such and just analyze trade in terms of the flow of goods. The most interesting thing about money here is inflation, which means we will pay off our dollar-denominated debts with money that buys fewer goods than it did when the debt was contracted. But this just means we made a promise to hand over goods in future and then cheated a bit. No promise is self-enforcing; foreigners take this risk.

6. ”Goods” above means anything that's worth money. It includes services. The financial services provided by Citibank are goods. Hollywood movies, tourist visits to America, wars paid for by shaking down the Gulf Arabs, and a lot of other odd things also count as goods. All that matters is that foreigners are willing to pay us for them.

7. “Office buildings” above actually means any existing asset. It can mean shares in corporations. It can mean patents. It can mean a bank in Japan buying part of a bank or a shopping center. It can mean a German businessman buying a house in Boston. It doesn't matter, so long as it used to belong to some American and now belongs to some foreigner.

These seven principles are inescapable. All the sophisticated complications of modern trade, finance, and economics cannot change them. They can only introduce a lot of wrinkles that appear to change them, a fact taken advantage of by free-trade ideologues who want to convince us that our trade deficit doesn't matter. But their arguments are usually quite easy to cut through if one just reduces them to the basic question analyzed above:

The answer is always 3a, 3b, or 3c: goods we produced today, goods we produced yesterday, or goods we promise to produce tomorrow. Unless, of course, a miracle has occurred, and we've established trading relations with Santa Claus and are getting things for free.

So if we’re not giving goods we produce today, we’re either living off our past, or mortgaging our future.

Currently, every year, we consume about more than we produce – about $800 billion, 6% of GNP, and rising – and make up the difference by borrowing and selling off existing assets. We are, in other words, living beyond our means. We are enjoying higher consumption levels in the present, at the price of becoming indebted, and of selling off the “family silver” of accumulated assets. Our worst-case scenario? Argentina. We end up devoting a huge share of our GNP to servicing past debts, and get no profit from our best productive assets, because we sold them off to foreigners years ago.

Does the Bush administration care about this problem, which is obviously a slow form of national decline, albeit a conveniently concealed one? Of course not. They’re happy to maintain short-term consumption levels, because it keeps the electorate pacified with a veneer of prosperity. They’re also happy to see American assets sold off to foreigners because, as globalists, they want to undermine our economic independence and “integrate” us into the global economy. And they don’t care about debts that will have to be paid back years after they’ve left office.

And if their spin-meisters in the business press and elsewhere can invent non-existent complexities, designed to make us think the problem doesn’t exist because of the magic of modern finance, so much the better. Hopefully, the above should cut through some of this.

4. Here's what #3 above really means:

"a. is when they sell us Sony televisions and we sell them jumbo jets.

b. is when they sell us Sony televisions and we sell them office buildings in New York.

c. is when they sell us Sony televisions and we go into debt to them to get the money to pay for them. "

What this vanity fails to mention is that "trade deficits" only count material things. They do not count services or information such as software. All of microsoft sales overseas, for example, do not count against the "trade deficit", so the whole concept is simply a chimera that serves to frighten people for no reason. America suffered a "trade deficit" in the decades of some of its most healthy and productive growth periods.
Remember, Services, which are now something like 70% of the American economy, do not count against the "trade deficit", so that if an American firm designs software or buildings for a foreign firm, it does not count against the "trade deficit".

-If services we export are not counted how about services we import?

-The trade deficit is 850 billion per year. If adjusted to your liking for "services" what would it run?

I hope hope hope hope no one falls for this nonsense.

Trade deficits do matter. The more trade-- the stronger the economy.

The bigger our trade deficit-- the stronger our economy is.

If our consumers have the money to buy something they want it is good economic news. The arbitrary drawing of borders about where the goods came from and where the cash goes is nonsense.

If the trade deficits went to zero it would indicate the catastrophic collapse of the US economy. If anything trade deficits indicate that foreign governments lack citizens of wealth to purchase items.

The US economy is the strongest in the world and has never been stonger. The trade deficit is part of the proof of its strength.

"-If services we export are not counted how about services we import?

-The trade deficit is 850 billion per year. If adjusted to your liking for "services" what would it run? "

First, my understanding is that services are not counted either way. I was shocked when I found out how much is not counted in the "trade deficit".

Second, I don't know, and I don't know if anyone does. This is one of the reasons the "trade deficit" doesn't matter. It is just one part of a very much larger puzzle, much of which is not known.

It is easy to be pessimistic, it seems to be part of human nature. But objectively, the country is extremely prosperous, we are in a boom, and are the most powerful and productive society on the planet.

This does not mean that we should not take care to keep on being productive and prosperous, but the more trade we have, the more prosperous we seem to have become.

LOL! That's why Japan has been in a recession for most of the last 15 years. That's why Germany had GDP growth in 2005 of 0.9%. That's why their unemployment rate in 2005 was 11.6%.

But in case 4b, the office building has already been produced, so no jobs today are created by selling it to some foreigner. The foreigner is just as happy to become the proud owner of a $500,000,000 office building in New York as he would have been to get $500,000,000 in jumbo jets, but we don’t get any jobs out of it.

Right. Because the seller of the office building (say Donald Trump) isn't going to take his money and build another building and create any new jobs. The seller isn't going to take his $500,000,000 and invest in in a new company or put it in the bank which lends it out to an expanding, job creating business. Nope, none of those things will happen. The seller will just take his $500,000,000 and put in under his pillow, where it won't create any new jobs.

In case 4c, while it is true that jobs will have to be created to produce goods at some time in the future to pay back the debt, these are jobs whose wages must be paid by us, not by foreigners, as the foreigners already gave us the goods, back when we bought from them on credit, so they don't owe us any more anything. So in essence, we must produce goods without getting paid!

What an idiot. Who is this guy, Pat Buchanan's limo driver?

These wicked foreigners sold us goods in exchange for dollar bills. They then took the dollar bills and bought a bond. The bond pays interest and at some point in the future the bond will mature and the wicked foreigners will again have dollar bills. If they want goods Americans produce, they'll exchange those dollar bills for the goods and the American workers will get paid for producing them.

So in essence, Robert Locke is a moron.

When foreigners give us goods, what are we giving in return?

The answer is always 3a, 3b, or 3c: goods we produced today, goods we produced yesterday, or goods we promise to produce tomorrow.

Exactly. That's why the trade deficit is not a problem. The foreigners will buy more of our goods (in the future) and we'll eventually get back the pile of dollar bills from those wicked foreigners that Pat Buchanan is so worried about.

Exactly. That's why the trade deficit is not a problem. The foreigners will buy more of our goods (in the future) and we'll eventually get back the pile of dollar bills from those wicked foreigners that Pat Buchanan is so worried about.

Let's see, we trade pieces of paper with dead presidents on them for TVs and stuff. Sound like a deal to me.

What people don't seem to realize is that those dollars have to come back to the U.S., usually as investment.

I have a huge (or should I say hugh) trade deficit with the grocery store near my home. I'm gonna show them! I'm going to start planting my own rice and beans and raise my own chickens!

And as far as the Chinese imports and the U.S. debt they own. Cool! I can't wait to see the expressions on their faces when we stiff 'em!

What people don't seem to realize is that those dollars have to come back to the U.S., usually as investment.

They realize it. The problem is, investment by Americans is good. Investment by foreigners is bad.

Get it?

And guess what they do with that investment? They get a return on it. Then earn profits if they buy a factory, farm or mine here. They earn rents if they buy real estate. They earn interest if they buy US government debt. Our trade deficit with China is 200 billion per year. They can make a profit off Americans with those investments

So you and others bought some Chinese electronics that will depreciate in value while the Chinese took that money and bought US factories that will make them more money

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