America’s Trade Deficit Is a Sign of Strength

A country runs trade deficits whenever it attracts more global capital than it repels

Letter to The WSJ.

"I hope that President Trump will read Joseph Sternberg’s column describing the economic doldrums inflicted on Europe by the European Union’s economic interventions (“Hurrah! Europe Is Fighting Over Economic Policy,” Political Economics, Feb. 13). Should he do so, the president might rethink his assertion that the EU has been “screwing us on trade”—a faulty conclusion that Mr. Trump grounds on the fact that the EU has consistently run annual trade surpluses with the U.S.

To describe real per capita gross domestic product growth in the EU as strong since 2009 would be generous and far from accurate; it has hardly grown. In the U.S., by contrast, real per capita GDP rose over these same years by about 32%. And yet in each of these years the U.S. ran a trade deficit with the EU, as well as with the rest of the world, while the EU, with the exception of 2022, ran a trade surplus with the rest of the world.

These data point to a reality that Mr. Trump refuses to acknowledge—namely, a country or region runs trade deficits whenever it attracts more global capital than it repels, and it runs trade surpluses whenever it repels more capital than it attracts. The EU consistently runs trade surpluses and the U.S. trade deficits not because the EU is cheating or besting America at trade but rather because the EU’s growth-stifling policies repel global investors while America’s more market-oriented policies are attractive to investors.

Mr. Trump’s obsession with putting an end to U.S. trade deficits will make America repel global investors.

Donald J. Boudreaux

George Mason University" 

The Trade Deficit Is a Boon to Our Net Worth

Homer sometimes nods—and so, too, does John Cochrane toward the end of his op-ed.

Letter to The WSJ.

"John Cochrane is always worth reading, and his op-ed “Trump’s Monetary Policy Desires Aren’t Crazy” (Oct. 22) is no exception. But as even Homer sometimes nods, so, too, does Mr. Cochrane.

He is correct that “countries that run perpetual trade deficits to finance consumption, borrowing abroad to do so, eventually must pay back the debt. Saving and investing rather than borrowing and consuming is good for an economy as it is for a family.” But he’s mistaken that “the central problem in our case . . . is the bounty was consumed rather than invested.”

The U.S. has run annual trade deficits for the past 50 years. If Americans used the bulk of this inward flow of foreign capital overwhelmingly to finance consumption, our real net worth would have fallen. In fact, the average American household’s real net worth is today 236% higher than it was in 1975. It is 142% higher than in 1994 when the North American Free Trade Agreement took effect, and 80% higher than in 2001 when China joined the World Trade Organization.

Some of this foreign capital financed the wasteful consumption that results from deficit spending. But the bulk of it clearly was used to increase our capital stock—and, therefore, to raise the productivity of our economy.

Prof. Donald J. Boudreaux

George Mason University"

The Defunct Economist Who Shapes Trump’s Trade Policy

Robert Triffin’s ‘dilemma’ didn’t pan out, but it holds sway over some of the president’s key advisers

By Joseph C. Sternberg. Excerpts:

"Clocking the precise relationship between the current-account deficit and foreign demand for dollars is difficult because economists first must try to estimate what the current-account deficit “should” be. This is a perilous econometric procedure vulnerable to bad modeling and dubious data.

Economists nonetheless often conclude the U.S. current-account deficit is larger than theories predict. Yet this mysterious “extra” deficit doesn’t appear to be correlated with periods of more rapid foreign dollar-reserve accumulation. Sometimes foreign governments amass dollar reserves faster while the U.S. trade deficit is narrower. At other times the U.S. trade deficit becomes larger while foreign reserve accumulation of dollars slows."

"Foreign official accumulation of Treasury debt has slowed to a trickle since 2015. During the same period the current-account deficit deepened. Nor is there a global dearth of safe assets that an unwilling Congress must ameliorate by running fiscal deficits against lawmakers’ will (ha!). Holdings of Treasurys in foreign-government reserve funds have fallen for a decade, to around 16% of the total float held outside the Federal Reserve from a peak of about 40% in the aftermath of the 2008 financial panic." 

"The central fact of the global economy is that the U.S. is an engine of productivity growth and attracts investment to match. These capital inflows, which enrich the U.S., also allow America to run trade deficits that it can finance relatively cheaply." 

Evaluating the US-Japan Trade Deal on Mercantilist Terms

By Jon Murphy.

"Short Version: it’s bad, even by the preferred metrics of protectionists.

On July 23, US and Japanese trade negotiators reached a deal on tariffs, investments, and other international transactions.  Much has been written about how bad the deal is from a standard economic perspective (see, for example, here).  But President Trump and his administration, who negotiated the deal, are mercantilist.  So here, I evaluate the trade deal from the mercantilist perspective, focusing primarily on the trade deficit.

A few notes first:

1. Details of not only this deal, but the others negotiated, are sketchy and subject to dispute.  In order to give the Trump Administration the benefit of the doubt, I will be using their announced conditions.
2. These are not deals in the traditional sense of legally binding agreements.  As best we can tell, they are verbal assurances of a potential framework for a legally binding agreements down the line.  But, for the sake of argument, I will treat this deal as if it were a formal, legally binding agreement between the two nations.

With the preliminaries out of the way, let us begin.

Trade Deficit

For mercantilists in general, and President Trump in particular, a trade deficit is a major concern.  Indeed, for the Trump administration, it is the overriding concern.  He invoked the authority to do these deals by declaring the mere presence of a trade deficit to be a national emergency. Therefore, let us begin our analysis by looking at what effect this deal will have on the trade deficit.

This deal will necessarily increase the US trade deficit with Japan.  Part of the deal is a $550 billion investment by Japan into the United States.  When a foreign investor invests in the US, that necessarily increases the trade deficit, because that is how the transaction is recorded in the National Income Accounts.  So, this investment part of the deal will increase the trade deficit.

Furthermore, the Japanese will need US dollars to accomplish this investment.  The only way they can get those dollars is by selling goods to Americans.  That means American imports from Japan will necessarily have to rise, and American exports to Japan will necessarily either not change or fall.  Since a trade deficit is defined as when exports are less than imports, under this scenario, the trade deficit must rise.

There is another, indirect way in which the trade deficit will likely worsen.  The US tariff on Japanese cars is now 15%.  US automakers face a rash of higher taxes, including steel tariffs (50%) and auto parts tariffs (various).  Japanese automakers do not face such tariffs.  Consequently, Japanese imported cars will now be relatively cheaper than their American-made competitors.  On the margin, Americans will purchase more imported cars than domestic cars.  Similarly, American auto exports to Japan are now relatively more expensive, which will reduce exports.  Again, the trade deficit rises.

Thus, given the mercantilist concern about the trade deficit, this deal is a bad one.

Protecting Jobs

A lesser concern for mercantilists is protecting jobs.  The effect the deal will have on jobs is ambiguous.  Assuming the investment deal goes through and doesn’t turn into a significantly scaled-back project like Foxconn, some jobs will be created in the United States, intended to be in LNG exports.  But, as discussed above, American auto manufacturers now face significant competition from Japanese auto firms.  And so, some jobs will be created.  Others, destroyed.  The net effect is probably close to zero.  Thus, from the mercantilist perspective on jobs, this deal is potentially bad, especially since autoworkers are another industry the American mercantilists wish to protect.

Conclusion

Other details of the deal are still obscure, so there is not much more to write.  But, given the information we do have based on the announcements from the Trump Administration, this is a bad deal by their own metrics."

Thinking About the Tariffs and the Laffer Curve

By James Pethokoukis of AEI.

"At a legendary 1974 Washington dinner, economist Arthur Laffer supposedly sketched his famous curve on a napkin, demonstrating how excessive taxation could reduce government revenue. Now researchers have applied this concept to tariffs, revealing a harsh truth: Even under optimal conditions, additional tariff revenues would peak far short of the amounts claimed by the Trump White House and just a fraction of the $2.4 trillion from federal income taxes. The more successfully tariffs cut imports, the fewer goods remain to tax, making a return to McKinley-era funding economically impossible.

Supply-side conservatives face a striking contradiction: While the famous supply-side theorist Jude Wanniski blamed the Great Depression on an investor freakout over the Smoot-Hawley Tariff Act, today’s supply-siders support President Trump’s tariffs despite negative market reactions. By Wanniski’s logic, these market selloffs should be viewed as rational verdicts on protectionist policies.

This inconsistency in supply-side thinking extends beyond market reactions to tariffs. The Laffer Curve demonstrates that between zero taxation (zero revenue) and 100 percent taxation (also zero revenue) lies a revenue-maximizing rate. When applied to tariffs, however, the analytical device suggests unavoidable and unpleasant trade-offs for Trumponomics supporters: The Trump administration wants tariffs to both reduce the trade deficit and increase revenue—goals that fundamentally conflict. 

A new analysis, “Tariffs cannot fund the government: Evidence from tariff Laffer curves,” undermines the idea that the Trump tariffs could replace federal income taxes.(A bit of basic trade economics: Tariffs don’t directly reduce trade deficits over the long run because these deficits are fundamentally determined by differences in savings and investment between the United States and foreign countries. Tariffs simply reduce overall trade. They cannot permanently alter net exports.)

So to execute this thought experiment, the researchers assume the US trade balance isn’t fixed. From this adjustment flows the finding that the more successful tariffs are at cutting imports, the fewer goods remain to tax. Shrinking imports automatically shrinks the taxable base. When tariff revenues help shrink the trade deficit by 50 cents on the dollar, the study finds, maximum additional revenue drops below $300 billion, enough to fund barely two weeks of federal spending.

From the paper:

In short, the Laffer rationale applied to US trade explains why a return to the McKinley era, when import tariffs used to finance half of US federal spending in the absence of income taxes, is unrealistic. Hiking import tariffs is not a viable solution to fund today’s public finances.

This reality exposes a central contradiction: A trade policy successful at reducing imports—which tariff opponents think is possible—necessarily limits its own revenue potential. For supply-siders who once championed tax reductions to stimulate economic activity, embracing tariffs (essentially tax increases on global commerce) represents a profound departure from their intellectual roots.

As markets continue to react negatively to protectionist policies, perhaps it’s time for a new napkin sketch, one that honestly depicts the limitations of tariffs as revenue instruments in a modern economy."

Adam Smith Would not Approve (of the recent tariffs)

By Janet Bufton. She is Program Coordinator & Co-Founder the Institute for Liberal Studies in Ottawa.

"Someone asked recently what would change as a result of the world being plunged into a trade war by the Rose Garden tariffs. I quipped that either Adam Smith would be proved wrong or we’d all get poorer. (This is also true of the scaled-back tariffs, which still leave American tariffs higher than they’ve been in a century.)

In response, as sometimes happens, they brought up Adam Smith’s arguments for tariffs. These arguments come from Book 4, Chapter 2 of Wealth of Nations. They’re a red herring, as we’ll see. But let’s look at how they apply.

There are two instances in which Smith says you can always justify managing trade, and two cases in which managing trade can’t be automatically condemned. Restrictions on imports can always be justified (1) in shipping because it’s tied to military defence, and (2) by taxing imports at the same rate that domestic goods are taxed to create a level playing field. Trade restrictions shouldn’t be automatically condemned when (A) they are retaliatory tariffs, or (B) free trade is being phased in.

So what’s the big deal? Retaliatory tariffs are right there in the list. Why would the Rose Garden tariffs vex Adam Smith?

Smith is very specific about when retaliatory tariffs are appropriate. “There may be good policy in retaliations of this kind, when there is a probability that they will procure the repeal of the high duties or prohibitions complained of.” (IV.ii.39) In other words, retaliatory tariffs are good if they secure freer trade. Israel’s elimination of tariffs against the United States did not spare them. When Vietnam and the European Union offered to eliminate all tariffs, the administration rejected these offers as insufficient. If these were meant to be retaliatory tariffs, they’ve failed.

But the Rose Garden tariffs were never retaliatory. They were not based on how much other countries tariff the United States. They are not even based on estimates of non-tariff barriers. The White House confirmed that the method used to calculate the tariffs was the trade deficit divided by U.S. imports from that country, then divided again by 2 (Unless a country does not run a trade deficit with the United States, in which case the tariff was set to 10%).

So it’s not about retaliation, but—at best—a negative trade balance. And we all know what Adam Smith said about the balance of trade, right?

“Nothing, however, can be more absurd than this whole doctrine of the balance of trade, upon which, not only these restraints, but almost all the other regulations of commerce are founded. When two places trade with one another, this doctrine supposes that, if the balance be even, neither of them either loses or gains; but if it leans in any degree to one side, that one of them loses and the other gains in proportion to its declension from the exact equilibrium. Both suppositions are false.” (WN IV.iii.a)

But anyway, Adam Smith’s arguments about tariffs are a red herring if we want to know what Adam Smith would think of these tariffs.

The effect of the tariff announcement in the Rose Garden was not simply to raise the price of international trade. As Thomas Sowell observed, the tariff announcement also introduced uncertainty that makes foreign investment and globally integrated supply chains more vulnerable—more risky—at the same time as the tariffs themselves make international trade more expensive. The overall effect of these policies is the effect of all trade restrictions: they effectively shrink the global market. Exchanges that would otherwise make sense become more expensive and they don’t happen.

Adam Smith’s core economic insight, the one from which all other arguments in the Wealth of Nations follows, is that the wealth of nations is a product of the division of labour (Book 1, Chapter 1), of cooperation facilitated by our natural propensity to truck, barter, and exchange (Book 1, Chapter 2). The division of labour is limited by how many people we can divide labour between, what Smith calls the “extent of the market” (Book 1, Chapter 3).

If we will not be poorer because the tariff announcement in the Rose Garden shrunk the number of potential trades, and with them the extent of the market, then the division of labour is not the source of the wealth of nations. If the Rose Garden tariffs won’t make us all poorer, then Adam Smith was wrong about everything.

If Smith was wrong about everything, who cares when he says tariffs are good?"

A trade deficit is typical of rapidly growing economies, which require a disproportionate share of the world’s resources, and provide investment opportunities to balance the equation

See Notable & Quotable: Robert Bartley on Trade Balance Fictions from The WSJ. Excerpt:

"the United States ran a trade deficit in nearly all of its first 100 years, and ran surpluses in the midst of the Great Depression. A trade deficit is typical of rapidly growing economies, which require a disproportionate share of the world’s resources, and provide investment opportunities to balance the equation. Indeed, under the accounting identity, investment inflows must be balanced with a deficit on the trade account. The mystery is why we even collect these figures; if we kept similar statistics for Manhattan Island, Park Avenue could lay awake at night worrying about its trade deficit."

China's Trade Surpluses are Not a Source of Strength

By John Phelan.

"In his new book Dawn’s Early Light: Taking Back Washington to Save America, Kevin Roberts of the Heritage Foundation argues that, “China believes it has a mandate to rule the world,” and that it is using trade balances to accomplish this.

This is an old tactic. “As far back as the Roman Empire,” Roberts argues, “the demand for Chinese manufacturers around the world substantially exceeded the Chinese demand for the things other countries produced…That trade imbalance helped shape the world economy-coinage from all over Europe and Asia has been discovered in Chinese archaeological finds, but to my knowledge no ancient Chinese coins have ever been located outside East Asia.” 

“China’s economic dominance, supply chain monopoly for desirable goods, and carefully controlled trade policies created substantial wealth for China’s rulers, if not for its people,” Roberts’ notes. Indeed, Angus Maddison’s estimates show per capita GDP in China falling from 106% of that in Britain in 1000 to 71% in 1500 and 28% in 1880. 

But, ultimately, Chinese trade surpluses didn’t help China’s leaders either. When Britain resolved to open China to trade by force in 1839, the ruling Qing dynasty found that all the coins it had accumulated as the reward for its trade surpluses were no defense against Queen Victoria’s gunboats. Those coins would have been better spent on weapons than being buried for archaeologists to discover. It was the country with the trade deficit that won the war, not the country with the surplus. “Before 1839,” Roberts writes, “trade favored the Chinese.” Little good it did them: China experienced military humiliation, political and social disintegration, and an eventual descent into communism.

Roberts argues that China’s:

…traditional strategy of generating massive trade surpluses should not have worked in the modern monetary system, because money today is not backed by bullion (the tons of gold and silver that flowed to China under the Canton System). Instead, the trade surpluses incurred by exporting more than its imports should have caused China’s currency to appreciate and its trade partners’ to depreciate. In the long run, that would have made Chinese manufactures more expensive and less attractive for outsourcing…

“That never happened,” he continues, because “China illegally devalued its currency, harming its own people but ensuring that the CCP’s strategy for hollowing out western manufacturing and returning China to global economic centrality would work.”  

But, again, little good it did them. While GDP per capita in China has risen from a low of 7% of the British level in 1950 to 34% in 2018 – a level last seen around 1770 – Roberts is right that China’s currency manipulations have imposed costs on its citizens in terms of reduced real incomes. That isn’t all. The currency creation necessary to keep the yuan’s exchange rate with the dollar somewhat stable when new dollars are being produced at an impressive rate has helped fuel one of the biggest property bubbles in history. 

“But even a Chinese domestic spending and debt spree could not absorb all of the trade imbalance,” Roberts writes, discovering that a US deficit on the trade account must be offset with a surplus on the capital account:

What China did to maintain its export advantage was devious: it invested in the United States, buying US assets with US dollars, thus propping up the value of the dollar (to keep Chinese products cheap) while seeking ownership of US companies, real estate, and more out of the United States and buying trillions of dollars’ worth of US government debt. The CCP today sits atop a $3 trillion hoard of assets, many of them American.

And, again, little good it did them. Holding significant stocks of depreciating US government debt isn’t, in fact, a source of strength. China cannot dump them to drive Federal borrowing costs up without tanking their value, which the Federal government is doing itself. As for those US assets, like farmland, it isn’t going anywhere, just like the buildings bought to much distress by the Japanese in the 1980s.  

China’s government might well be running a trade surplus as a matter of policy. It may even be doing so with the aim of strengthening itself relative to geopolitical rivals like the United States. But if, as Roberts argues, it has tried this before, that same history indicates that the prospects for the government in Beijing are not good. Little good it did the Qing dynasty and little good will it do the Communist Party." 

Trump’s Tariffs Have McKinley Turning in His Grave

The 25th president used reciprocity to press for an expansion of trade. The 47th is going backward

By Phil Gramm and Donald J. Boudreaux. Excerpts:

"Reciprocal trade policy as envisioned by President William McKinley, whom Mr. Trump often cites as his role model, recognized that by the dawn of the 20th century America had emerged as an economic colossus capable of producing an abundance of products that could be profitably exported. As McKinley explained, “the expansion of our trade and commerce is the pressing problem. Commercial wars are unprofitable.”"

"McKinley’s reciprocal trade policy was aimed at opening markets for U.S. products with agreements that lowered tariffs on imported products proportionately as other countries lowered theirs on U.S. products."

"nowhere does he propose real reciprocity. He could eliminate the 25% U.S. tariff on imported trucks as an inducement to other countries to eliminate their tariffs on U.S. automobiles. Mr. Trump denounces high tariffs on U.S. exports to Central and South America and would use his theory of reciprocity as an excuse to raise U.S. tariffs on imports from those countries. But real reciprocity would be achieved by eliminating the quota on U.S. imports of sugar, for which Americans pay twice the world price, in return for Central and South American countries lowering their tariffs against U.S. products."

"The trade wars that wrought havoc in the 20th century occurred because of America’s efforts to protect agriculture from foreign competition in the 1920s and ’30s"

"Congress rushed to pass the 1922 Fordney-McCumber tariff to protect American agriculture"

"Herbert Hoover, running for president in 1928, promised to support additional farm tariff protection. Efforts to provide that protection ultimately produced the Smoot-Hawley Tariff Act of 1930 as industry piggybacked on the support for farm tariffs to pile on industrial tariffs as well."

"the 1922 tariff made it virtually impossible for Germany to pay its war debts"

"this protectionism denied a world market to U.S. manufacturing, where employment and wages were rising." 

"Wages in manufacturing are lower on average than wages in the service industries. Technology has continued to expand America’s industrial capacity while employment in manufacturing as a share of total nonfarm employment has fallen by 75% since 1946."

"under the protectionist policies of the first Trump administration the trade deficit rose, employment in manufacturing as a percentage of total employment continued to decline, and economic growth, which reached a 13 year high in 2018 under Mr. Trump’s deregulatory and tax-cut policies, slumped under his tariffs."

Do U.S. Trade Deficits Reduce Americans’ Net Worth?

By Don Boudreaux.

"Here’s a letter to a new correspondent.

Mr. R__:

Thanks for your kind e-mail.

About America’s trade deficits with foreigners you ask: “But is it not a problem that they end up owning more and more of our equities and farmland? Are we not impoverishing our future selves by selling off our assets to fund the consumption of cheap goods?”

Your question is understandable. U.S. trade deficits could result in the outcome you describe, and they would do so if a large-enough portion of Americans became willing to eat into their net worth in order to fund their current consumption. (If so, by the way, I would still oppose government intervention as I believe that people who earn incomes and accumulate wealth are entitled to spend those incomes and to dispose of that wealth as they choose. And it would also be bad economics: For government to interfere in this way is for government to dim the incentive to earn income and to accumulate wealth in the first place.)

But trade deficits do not necessarily result in the outcome you describe, and, in the actual case of the United States, do not in fact do so. Indeed, they have the opposite effect.

Contrary to countless careless or uninformed assertions, it’s simply untrue that a $1 increase in the U.S. trade deficit necessarily results in a $1 decrease in Americans’ net worth – a decrease in net worth brought about either through a $1 increase in American indebtedness to foreigners or a $1 decrease in Americans’ net ownership of assets.

Suppose Tim in Texas spends $40,000 on a pick-up truck made in Japan. If Mr. Toyoda turns around and spends that $40K on oranges from Florida, there’s no change in the U.S. trade deficit: the $40K of U.S. imports are matched by $40K of U.S. exports. But suppose instead that Mr. Toyoda uses the $40K to buy shares of Apple, Inc., from Vero in Virginia. In this case the U.S. trade deficit increases by $40K. If Vero then uses that $40K to throw a gigantic party, then Vero’s net worth falls by $40K – and, because Vero is an American, the aggregate net worth of Americans falls by $40K (although it’s worthwhile to point out that no other American’s net worth falls as a result of Vero’s consumption; that fall in wealth is, as we say, fully “internalized” on Vero).

But suppose instead that Vero uses that $40K to start a new business in Virginia that soon begins turning a profit. Her business is so successful that its market value soon grows to $1 million. In this case the train of transactions results in an increase in the net worth of Vero – and, hence, of Americans – of $960,000.

You might ask if Vero could have achieved the same result by selling her Apple shares to a fellow American. Fair question. First, the value of those Apple shares is surely higher than they would be if foreigners weren’t able or willing to bid for them. Without foreigners’ ability and willingness to bid for dollar-denominated assets, Vero almost certainly would have received less than $40K for her Apple shares.

Second, even if Vero sold her Apple shares to Mike in Maine for $40K, from where did Mike get the $40K? If, as isn’t implausible, Mike paid for these shares by withdrawing $40K from his savings account, then his net worth doesn’t change while Vero’s rises by $960,000. It appears that this outcome is the same as when the U.S. trade deficit rose by $40K. But this appearance deceives. Because Mike’s bank now has fewer reserves, it won’t make the $30K loan to Valerie in Vermont that Valerie would have used to successfully expand her business. As a result, Valerie’s net worth is lower than it would have otherwise been. Because Valerie is an American, Americans’ aggregate net worth winds up, in this example, being lower than it winds up being when Vero sold her Apple shares to someone in Japan.

When there’s a rise in net global investment in the U.S., U.S. trade deficits increase, but the amount of capital in America also increases, enabling – as the above examples show – Americans’ own net wealth to increase.

The above examples, of course, are hypothetical. So what are the facts? The U.S. last ran an annual trade surplus in 1975. In that year, the average net worth of a U.S. household, in 2024 dollars, was $364,893. (See the link just above.) Today (the fourth quarter of 2024) the average net worth of a U.S. household (in 2024 dollars) is $1,212,974 – meaning that the average net worth of a U.S. household is today 232% greater than it was in 1975. This reality is practically impossible to square with the assertion that trade deficits are draining Americans of their wealth. Quite the opposite seems to be happening."

Trump’s Myth of the Trade Deficit

Economic growth depends on deregulation, tax cuts and the budget deficit, not on the balance of trade

By Phil Gramm and Donald J. Boudreaux. Excerpts:

"he’s announced several ambitious plans to increase foreign investment in the U.S. economy. The commitment both to eliminate trade deficits and to pursue foreign investment shows the inconsistency of the Trump administration’s policy. Trade deficits and capital surpluses are two sides of the same coin."

"if the U.S. has a surplus in its capital account balance, it must have a corresponding deficit in its trade balance."

"If Japanese tech-investing firm SoftBank fulfills its Dec. 16 commitment to invest $100 billion in the U.S., as SoftBank acquires dollars to fund the investment, the value of the dollar will rise"

"foreign capital investment creates American jobs and fuels economic growth no less than do foreign purchases of American exports."

"In the 29 years after the end of World War II, during which the U.S. had a virtual monopoly in heavy manufacturing and regularly ran trade surpluses, real per capita gross domestic product grew 2.1% a year. Over the next 29 years, from 1976 through 2004, the U.S. ran chronic trade deficits, and the average annual growth rate of real per capita GDP was virtually identical: 2.2%.

During 102 of the 120 months of the Great Depression, the U.S. ran trade surpluses. From 1900 to 1929, years of high economic growth, it also ran trade surpluses. From 1830 to 1860 and 1870 to 1890, when average tariff rates on imports were falling and the rate of industrialization was rapidly increasing, the U.S. generally ran trade deficits in goods and services.

Between 1890 and 2024, it is impossible to find a statistically significant correlation between America’s trade balance and its economic growth."

"U.S. industrial production today is more than double what it was in 1975, the last time we ran a trade surplus. It’s 55% higher than in 1994, when the North American Free Trade Agreement went into effect, and it’s 18% higher than it was when China joined the World Trade Organization in 2001. Real wages are up 19% from 1994 and 10% from 2001. The inflation-adjusted value of America’s capital stock is 36% higher today than it was in 2001, 66% higher than it was in 1994, and 178% higher than it was in 1975."

"Manufacturing as a share of total nonfarm employment peaked during World War II and has declined ever since, following the pattern of employment in agriculture, which fell from 40% of the labor force to 2% over the course of the 20th century. This is attributable not to globalization, but to the spread of modern technology and the rise in demand for services relative to goods. Neither Nafta nor China’s membership in the WTO notably increased the secular rate of decline in the share of workers employed in manufacturing."

Gramm and Summers: A Letter on Tariffs From Economists to Trump

Like our predecessors in 1930, we oppose the use of tariffs as a general tool for economic policy.

By Phil Gramm and Larry Summers. Excerpts:

"Protective tariffs distort domestic production by inducing domestic producers to commit labor and capital to produce goods and services that could have been acquired more cheaply on the international market. That labor and capital are in turn diverted from producing goods and services that couldn’t be acquired more cheaply internationally. In the process, productivity, wages and economic growth fall while prices rise. Tariffs and the retaliation they bring also poison our economic and security alliances."

"Contrary to the repeated claim, there has been no hollowing out of American manufacturing. Industrial production in the U.S. is at an all-time high. The U.S. is producing 2.5 times as much real industrial output as it did when we last ran a trade surplus in 1975. We are producing that record output with the smallest percentage of the labor force involved in manufacturing since America became fully industrialized. The percentage of the civilian nonfarm labor force employed in manufacturing peaked during World War II and has been in secular decline ever since."

"The decline in manufacturing employment as a percentage of total employment is being driven by the same secular forces that caused employment in agriculture during the 20th century to fall from 40% to 2% of the labor force: a vast increase in labor productivity and a decline in the demand for manufactured products relative to services."

"there is little evidence to substantiate the claim that America prospers more when trade deficits fall than it does when they rise."

"The same phenomenon occurred during the Clinton boom: So strong was the attractiveness of investing in America that the trade deficit continued to grow even as the federal government ran budget surpluses. The annual real trade deficit nearly doubled during the four years in which the U.S. government was running a budget surplus"

"The tariffs on steel and aluminum created only a small number of jobs, but since for every worker in the steel and aluminum industries there are 36 workers employed in American industries that use steel and aluminum in production processes, those modest gains were offset by the jobs losses in industries that use steel and aluminum as inputs. With foreign retaliation, the estimated cost to the economy of jobs created by the 2018 tariffs on washing machines, steel and aluminum clearly amounted to many times what the jobs paid in wages."

"A review of the economic history of our nation yields no credible evidence that broad-based tariffs have benefited the nation as a whole. Protectionists often point to the 19th century as a period of high tariffs and strong economic growth. But a close look at the data for the 19th century shows conclusively that the country industrialized fastest when tariffs were falling, not when they were rising."

Trade is not causing poverty and low productivity is not causing trade deficits

See Yanis Varoufakis Is Mistaken Both In Fact and In Theory by Don Boudreaux.

"UnHerd usually publishes good stuff. But this piece by Varoufakis is a joke.

Editor, UnHerd

Editor:

Yanis Varoufakis is right to be skeptical of Trump’s proposed tariffs, yet nearly everything else in his essay is wrong (“Can Donald Trump’s tariffs fix America? He’ll have to ditch the financiers first,” Nov. 12). Here are two examples.

First, contrary to Varoufakis’s assertion, it’s untrue that very many Americans live in or near dire poverty – that they can “barely afford a house or even the bare necessities.” America’s official poverty line is that of one of the richest nations in history, so even if a large percentage of Americans were today hovering near or below this threshold, those Americans are rich both in comparison to nearly all human beings (including Americans) who lived earlier and to very many people today outside of America whose incomes put them well above their countries’ official poverty lines.

More fundamentally, many of the official numbers used to concoct the tale that most Americans have suffered economic stagnation now for a half-century are deeply flawed. To get the facts straight, I urge your readers – and Varoufakis – to consult works by Phil Gramm, Robert Ekelund, and John Early, by Michael Strain, and by Scott Winship and Jeremy Horpedahl, among others.

Second – as the accompanying graph shows – GDP per hour worked in America remains above that in Germany and Japan, which is strong evidence against Varoufakis’s claim that starting in the 1960s and ‘70s factory productivity in America “fell behind those of Germany and Japan, causing the US trade balance to slip into the red.” And not only do American workers produce more output per hour than do workers in Germany and Japan, Americans work more hours than do the Germans and Japanese.* Therefore, Varoufakis’s suggestion that we Americans for a half-century now have produced so little that we’re compelled to import is ludicrous.

Indeed, America’s nearly half-century long string of annual trade deficits, far from being caused by low productivity in the U.S., is largely a consequence of high productivity in the U.S. After all, capital flows to where it reaps the highest returns, and returns are higher in high-productivity countries than in low-productivity countries. In addition, these investment inflows – which create the accounting artifact called “trade deficits” – equip American workers with more and better tools to work with and thus ensure that the productivity of America’s economy is higher than it would be otherwise."

Worry Not About So-Called “Trade Deficits”

Don Boudreaux. 

"This piece by Rapoza also features a discussion of the U.S. trade deficit in “goods” – any mention of which is a sure sign that the writer is a poor economist. A trade deficit in tangible things is no more economically meaningful than is a trade deficit in yellow things or things that start with the letter “V.”

…………..

Contents Editor
Center for a Prosperous America (CPA)

Editor:

Kenneth Rapoza concludes his recent piece on the U.S. trade deficit by quoting CPA president Jeff Ferry’s worry that “it is hard if not impossible to see how we can generate significant economic growth in this country while the trade deficit continues at close to a trillion dollars, or 3 percent of GDP” (“Annual Goods Trade Deficit Has Fallen, But Still Beats $1 Trillion. China Deficit Shrinks By Billions.” February 7).

Let me help clear Mr. Ferry’s vision. The annual U.S. trade deficit has hovered near three percent of GDP for the past quarter-century – and when, during this time, it wasn’t close to the three-percent figure it was well above (as in larger) and never much below it. And yet the trend of real per-capita GDP growth during these years shows no sign of deviating from its long-term trend dating back to 1947. Real per-capita GDP is trending upward today along the same path that marked its growth for decades earlier, including the years 1947-1976 when the U.S. generally ran annual current-account surpluses.

Rather than fret about U.S. trade deficits, we should recognize that these “deficits” represent net inflows of capital into our country – and net inflows of capital stimulate, rather than stymie, economic growth."

A recent posting at the American Compass describes a trade problem that is not really a problem and then prescribes three bold solutions that are not really solutions

By Daniel Griswold of Cato and Spencer Pratt.

"A recent posting at the American Compass describes a trade problem that is not really a problem and then prescribes three bold solutions that are not really solutions. If implemented, their proposals would in fact create real problems for an American economy struggling to tame inflation and dodge a recession.

Like many skeptics of trade, American Compass focuses on the trade deficit as a sign of failure of U.S. trade policy. Here’s how it summarizes the problem: “America imports massively more than it exports, leaving us deeply indebted to our trading partners. Rather than exchange American goods for foreign goods, we import on credit, sending back IOUs and ownership of our economy, which future generations will pay for. In the process, we allow the erosion of American industry and innovation, the decline of manufacturing employment, and the collapse of communities.”

To combat the deficit, the American Compass proposes three sweeping new tax and licensing systems on international commerce: 1) a Global Tariff on all U.S. imports starting at 10 percent; 2) a licensing system of Import Certificates that would ration the value of U.S. imports to equal the value of U.S. exports; and 3) a Market Access Charge of 50 basis points or more on all foreign purchases of U.S. assets, i.e. inward foreign investment.

Before I count the ways that each of these prescriptions would damage the economy and the well‐​being of Americans, let’s examine what’s wrong with the diagnosis.

The Non‐​problem of the Trade Deficit

The U.S. trade deficit is not a problem to be solved, but a basic feature of a U.S. economy that excels at attracting foreign investment from around the world. That investment, which even American Compass folks occasionally celebrate, keeps domestic interest rates lower than they would be otherwise and fuels job creation, innovation, and the construction or modernization of plant and equipment at U.S. factories.

American Compass complains that years of trade deficits have only succeeded in piling up “more than $13 trillion of trade debt.” That figure is a misleading way of describing America’s “net international investment position”—the difference between the value of assets abroad owned by Americans and the value of U.S.-based assets owned by foreigners. At the end of 2020, the difference was indeed more than $13 trillion, with foreign‐​owned assets in the United States totaling $46.7 trillion and U.S.-owned assets abroad $32.0 trillion. But that difference is not “debt” in any normal sense. Most of the assets that foreigners own in the United States are in the form of foreign direct investment (FDI) in U.S. companies and portfolio investment in equities. When people outside the United States invest $1 billion in Apple Inc. stock or an automobile factory in Tennessee, this is not debt our children need to repay, but an infusion of new capital into the American economy.

The critics push back that almost all inward FDI comes in the form of mergers and acquisitions rather than “greenfield” investment in new plants. But as my Cato colleague Scott Lincicome has argued, this misses the important fact that those mergers and acquisitions allow U.S. sellers to reinvest those funds in other enterprise, injecting additional capital into the U.S. economy. Those transactions also encourage further investment in domestic firms that may then draw foreign partners in the future. Foreign acquisitions also typically lead to improved production methods, better marketing and customer service, and greater investment in research and development. The net inflow of FDI enhances the productivity of the nearly 8 million Americans who work for foreign‐​owned affiliates in the United States, boosting their wages and benefits.

Whatever its composition, the $13 trillion in “trade debt” is economically sustainable. Americans routinely earn about $200 billion more each year on their investments abroad than what foreigners earn on their investments in the United States. And $13 trillion may seem like a big number, but according to the Federal Reserve Board’s quarterly “Financial Accounts of the United States,” the net worth of American households, non‐​profits, and businesses (corporate and non‐​corporate) at the end of 2020 was a whopping $170 trillion. Far from selling off our assets to fund consumption, the net worth of Americans has been growing impressively since the Great Recession of 2008-09. The inflow of foreign capital has made America a wealthier place.

The American Compass critique is even flimsier when it claims that trade deficits have been bad for American industry. It’s true that manufacturing employment has been on a downward trend, but that has been true for decades. The decline is driven more by rising productivity in manufacturing rather than by rising imports—and it’s been happening (often even more steeply) in countries such as Japan and Germany with persistent trade surpluses. Meanwhile, total manufacturing value‐​added in the United States, adjusted for inflation, has increased 36 percent since 2000—reaching a record $2.5 trillion in 2021. The struggles of certain communities tied to heavy industry, such as Youngstown, Ohio, date back to the 1970s, before trade deficits became an issue.

To address this non‐​problem of the trade deficit, American Compass calls on the federal government to dramatically extend its powers to tax and regulate America’s international commerce. Leaving aside the obvious conflicts these policies would have with U.S. international trade agreement commitments, each suffers from serious economic flaws:

Non‐​solution #1: The Global Tariff

The first club American Compass would wield is a “Global Tariff.” The tariff would start at 10 percent on all imports, rising by another 5 percentage points each year if the trade deficit persists. If the U.S. runs a trade surplus, the global tariff would fall by 5 percentage points in the following year.

This crude sledgehammer would do nothing to “cure” the trade deficit. As the American Compass authors acknowledge, such a tariff would not alter the net inflow for foreign investment, which by necessity mirrors the trade balance. Despite the tariff, foreign investment would continue to flow into the United States, filling the gap between the level of domestic savings and investment. That’s why the U.S. goods deficit remained high under the Trump administration, around $800 billion a year, despite its escalating tariff war with China and other major trading partners.

A global tariff on U.S. imports would reduce overall trade but not the trade deficit. To the extent it discourages imports, it will cut the flow of dollars into the foreign exchange market, driving up the dollar’s value and discouraging exports, while likely spurring retaliatory tariffs as well. Both imports and exports would fall in roughly equal measure, leaving the trade deficit fundamentally unchanged. Without a change in the trade deficit, the global tariff would continue to rise unchecked until it would virtually cut the United States off from international trade.

The global tariff would drive up the cost of living for American workers and families and the cost of business for American producers. U.S. businesses would be forced to pay more for imported components, commodities, and capital machinery, making them less competitive in global markets. For American households, the tariff would fall disproportionately on lower‐​income households, which spend a higher share of their incomes on more tradable goods such as food, clothing, footwear, and housewares. It would further reduce the real wages of American workers, who are already struggling under the highest inflation rate in 40 years.

Proponents of the global tariff wistfully claim that the higher prices would be offset by the redistribution of tariff revenue. They claim, for example, that the tariff revenue could be used to offset sales taxes, but of course it’s the federal government that collects the tariff revenue while it is states that impose sales taxes. Do they assume the debt‐​ridden U.S. treasury will send billions to California, New York and other states so they can reduce their sales taxes? That is not likely. In practice, their tariff would act as a regressive tax that would widen income inequality.

Non‐​solution #2: The Import Certificate

Under this second club, Congress would create a licensing system that would allow U.S. companies to import only when they can present a government certificate authorizing the transaction. Companies could earn certificates by exporting, and then sell them for the going price on an open market—similar to “cap and trade” markets for pollution control. A company that exports $100 million in, say, wheat or semiconductors could then sell the certificate it earned to another company that wants to import $100 million in bananas or shoes. The system, if rigorously enforced, would in theory reduce the value of imports to match the value of exports. Hocus Pocus, Alakazam, no more trade deficit!

In practice, import certificates could be an even worse restriction on international trade than the global tariff. It would create a kind of “licensing raj” that was a sad feature of pre‐​reform India, longtime economic basket‐​case Argentina, and other developing countries forced to ration foreign exchange reserves. It would expand the power of the administrative state, encourage smuggling, complicate supply chains and potentially create shortages on retail shelves as well as factory assembly lines. Like the global tariff, it would raise costs for U.S. households and producers but without producing any tariff revenue that could—in theory, at least—be used to compensate households or invest in public infrastructure.

Like a tariff, import certificates would also fail to address the underlying causes of the trade deficit. The national level of savings and investment that drive cross‐​border investment flows would not be fundamentally altered. If the government attempted to enforce such a licensing scheme, the value of U.S. imports would almost certainly drop, but so too would the outflow of dollars from the United States into global currency markets. This in turn would drive up the value of the dollar, making U.S. exports and U.S. assets more expensive and less attractive to foreign buyers. Imports and exports would both fall in a death spiral, depriving the U.S. economy of the gains from both international trade and investment.

Non‐​solution #3: A Market Access Charge on Inward Investment

The third club proposed by American Compass would empower the Federal Reserve Board to impose a “Market Access Charge” on the purchase of domestic assets by foreign entities. Under their plan, the Fed would start by charging 50 basis points (0.5 percent) on the value of any foreign purchase of a U.S. asset. As with the global tariff, the Fed would be directed to vary the charge depending on the size of the deficit, “increasing it while the trade balance remains in deficit and decreasing it once trade is balanced.” Banks would collect the charge from cross‐​border financial transactions and deposit the revenue in an “American International Competitiveness Account” at the U.S. Treasury “to be used for improving global competitiveness”—whatever that means.

A tax on inward capital flows is arguably the most serious of the three “solutions.” It at least has the virtue of aiming at the underlying cause of the trade deficit—the persistent net inflow of foreign capital to the United States. A bill has been introduced in the U.S. Senate that closely resembles the American Compass proposal. But like the two clubs aimed at imports, it’s hard to imagine how making U.S. assets less attractive to foreign investors will make Americans more wealthy and prosperous. Russia’s war in Ukraine has made its assets less attractive, downright toxic, to foreign investors. This may have even contributed to an “improvement” in Russia’s trade balance, but the flight of foreign capital has caused real damage to its domestic economy and living standards.

If the access charge were to work as advertised, it would deprive the U.S. economy of investment capital. Domestic savings would need to rise, or the level of domestic investment to fall, for there to be any real change in the trade balance. With U.S. household savings low, and the federal government still borrowing a trillion dollars or more per year, less inward foreign investment would likely translate into a lower level of domestic investment (with federal borrowing crowding out private investment). Less foreign demand for Treasury bills would put downward pressure on bond prices, leading to higher interest rates, driving up borrowing costs for the federal government, businesses, and homebuyers.

In reality, the inward investment tax may have less impact than its advocates predict. The United States remains the most popular “safe haven” for global savings. The U.S. economy, and in particular Treasury bills, offer global investors safety and liquidity in times of economic or geopolitical uncertainty. In effect, the United States acts as “banker to the world,” paying a lower interest rate on global inward investment while earning higher returns by re‐​investing those funds at home and abroad. An access charge on U.S. assets is unlikely to fundamentally alter the global appeal of U.S. assets, leaving the trade deficit intact while expanding the taxing power of the federal government.

For all the reasons above, a persistent trade deficit at current levels would be far preferable for the U.S. economy and the welfare of Americans than any of the three radical interventions proposed by the American Compass and its fellow travelers."

When it comes to the trade deficit, policy wonks were right and the president was wrong

See Trump 0, Nerds 1 by Veronique de Rugy.

"President Donald Trump hates the trade deficit. On the campaign trail back in 2016, he argued that this gap—the imbalance between the value of America's imports and exports—was a sign that China, and others, were "stealing our businesses, stealing our jobs, stealing our money." If elected, he promised, he would "end our chronic trade deficits."

Many politicians make promises on the campaign trail but never really try to deliver on them. Unfortunately, Trump really did make the reduction of the trade deficit a top priority as soon as he got into the White House. His policies to achieve this: an erratic mix of angry tweets, unilateral tariffs hikes, and threats to tear up trade agreements if the original signatories refuse to renegotiate them on Trump's terms.

As these moves set off a global trade war, Trump's defenders formulated—or, more accurately, dusted off—protectionist arguments for forcing other nations to import more from, and to export less to, the U.S. This, they told us, would bring factories back to the U.S.

That was the plan, anyway. What happened instead followed the path that free traders predicted.
As they explained, a country's trade balance is determined overwhelmingly by factors such as the U.S dollar serving as a reserve currency, the ratio of savings to investment opportunities at home and abroad, and the relative attractiveness of that country's investment climate. As long as the United States is growing and remains an attractive place to invest, we Americans will continue to run trade deficits with the rest of the world.

What tariffs can do, they continued, is affect bilateral trade balances with the individual countries against which the tariffs are applied. But this mostly leads American buyers to shift their purchases of imports from one nation to another—say, from China to Vietnam—so U.S. manufacturing is not increased and America's overall trade deficit isn't affected. If there is a reduction in our trade deficits, that won't be because manufacturing is "returning." It'll be because both imports and exports are falling, with the former coming down more than the latter.

Underneath Trump's policies is a profound ignorance of the tight connection between imports and exports. Foreigners sell goods and services to U.S. buyers in order to acquire American dollars. They want these dollars, in part, to buy American exports. So when U.S. imports grow, so do U.S. exports. The reverse is also true: reducing American imports causes Americans to shrink.

More important, and often overlooked: Foreigners want dollars also to invest in America's powerful economy. That includes (but of course isn't limited to) buying U.S. Treasury bonds. In consequence, every dollar Americans spend on foreign goods and services comes back to us. As the U.S. trade deficit rises, investment flows into America increase by the same amount. As the nerds say, the current-account deficit is a mirror image of the capital-account surplus. This is why Mark Perry of the American Enterprise Institute describes imports as "job-generating foreign investment surpluses for a better America."

It is thus no surprise that as the American economy grew, the trade deficit also grew. This also explains why, as the U.S economy cooled in 2019—in part because of the Trump's trade wars and the rampant uncertainty they created—the trade deficit started to shrink. As this chart shows, higher U.S. trade deficits tend to be associated with faster, not slower, U.S. economic growth.

The bottom line: Absent any major changes in the aforementioned macro factors, over which this president has little control, any reduction in the trade deficit would likely be accompanied by weaker economic growth, as was true during the Great Recession or the Great Depression. 

Trump and his supporters have started to cheer the $10.9 billion reduction of the trade deficit in 2019 as a sign that his policies worked. Trump and his defenders also trot out anecdotes of manufacturing jobs returned to the U.S. as evidence that the newly renegotiated trade deals are succeeding. The reality is quite different. As tariffs increase prices for American buyers (particularly manufacturers), manufacturing activity slowed down and is now bordering on recession. And that trade deficit reduction, as recent Census data reveal, is the product of both imports and exports falling. 

Something else in those Census numbers: Tariffs on Chinese imports may be reducing our bilateral trade deficit with China, but that doesn't mean Americans are buying from U.S. producers instead. Instead, places like Vietnam, Mexico, and Malaysia are picking up the slack.

So the free traders were right. If you want to lower the trade deficit, your best bet is to reduce both imports and exports—or just to have an economic crisis. Who really wants that?"

The iPhone Isn’t Made in China—It’s Made Everywhere

The global supply chains behind Apple’s smartphone show why trade deficits are so pointless as a measure of economic strength

By Fred P. Hochberg. Excerpts:

"The iPhone was invented and designed in America, is powered by Central African minerals and is brought to life by European and Asian technologies, but both the World Trade Organization and the U.S. nevertheless classify it as a 100% Chinese export.
 
For the purposes of calculating the U.S. trade deficit, it wouldn’t matter if 99 out of every 100 iPhone suppliers were located in downtown St. Louis. The country “where the last substantial transformation” of a product occurs gets credit for it. Because the overwhelming majority of iPhones have their final assembly done in China, the value of their Swiss gyroscopes, Dutch motion chips, Japanese retina displays and American glassware gets assigned to the Chinese economy. The iPhone’s assembly is largely handled by the Taiwanese company Foxconn Technology Group, the world’s largest contract manufacturer of electronics. According to Reuters, that final assembly is estimated to represent just 3-6% of the cost of building each phone, or about $10 to $20 for every iPhone X."

"Because the trade deficit is calculated using factory costs—an estimated $230 per iPhone—rather than retail prices, iPhones would contribute about $16 billion to the U.S. trade deficit with China. Only Apple knows the exact number of iPhones sold in the U.S. each year, so the actual value of these imports could be somewhat lower or higher, but the figure is certainly in the tens of billions, which gets factored straight into our $420 billion trade deficit with China.

"Yet every time a $999 iPhone gets sold to a U.S. customer, that money doesn’t get wired directly to Beijing. The global information provider IHS Markit estimates that for every iPhone X that gets sold, $110 is sent to Samsung, the South Korean conglomerate that makes iPhone displays."

"Another $44.45 finds its way to the iPhone’s memory chip suppliers: Toshiba Corp. of Japan and SK Hynix Inc. of South Korea. A little money goes to Singapore; a little goes to Brazil; a little goes to Italy; and a little goes to Corning, N.Y. The vast majority of those dollars go to Apple Park in Cupertino, Calif., while China earns only an estimated $8.46 for the labor and parts that it supplies.

The iPhone may be calculated as a Chinese import, but most of the money that Americans spend on them doesn’t travel far from home."

"Trade deficits are also unreliable measures of economic health for several other reasons. For one, they can be easily distorted by factors that go beyond a tally of imports and exports. When the U.S. dollar rises or falls in value, for example, our trade balances fluctuate. A high dollar renders American exports more expensive and imports cheaper. So even if the number of products that the U.S. has imported from overseas hasn’t changed, when the dollar becomes more valuable, American shoppers will probably buy more imports and sell fewer exports—making the U.S. trade deficit “worse.”"

"Global trade has made many products cheaper, stronger, more innovative or more accessible by influencing supply and demand. It lowers the price tag on our clothing, allows for more durable car parts and provides us with blueberries in the wintertime."

"By weaving together the technologies and resources of many countries, trade has made extraordinary products possible. American audio chips, Korean batteries, Congolese minerals, Japanese cameras, German accelerometers: The iPhone may well be the most truly global product yet."

"If Americans were left to our own devices, we’d be left without many devices of our own."

Does the U.S. Dollar’s Role as Major International Currency Explain Persistent U.S. Current-Account Deficits?

By Don Boudreaux.

"Here’s a letter to the Washington Post:

Robert Samuelson rightly criticizes Pres. Trump’s obsession with trade deficits (“Getting schooled on trade,” May 28). But Mr. Samuelson’s own explanation of persistent U.S. trade deficits misses the mark. While it’s true that the dollar’s role as the major international currency does contribute to U.S. trade deficits, it’s not true – contrary to Mr. Samuelson’s claim – that this role of the dollar is the chief cause of U.S. trade (or, more generally, current-account) deficits.

The most fundamental reason that the U.S. runs persistent current-account deficits is that America remains a relatively attractive place to invest. And so to get the dollars that they invest here, foreigners buy fewer American exports than otherwise, thus increasing U.S. current-account deficits (and, don’t forget, thereby increasing U.S. capital-account surpluses). Even if the dollar were not the major international currency, the U.S. economy’s vast size, openness, and governance by the rule of law would still attract such a large amount of foreign investment to our shores that we’d likely continue to run current-account deficits year after year.

For historical evidence, consider the thirty years from 1849 through 1878. During this period the U.S. ran persistent current-account deficits* yet the major international currency back then was the British pound and not the U.S. dollar.

Sincerely,

Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

* Robert E. Lipsey, “U.S. Foreign Trade and the Balance of Payments, 1800-1913” NBER (April 1994), table 4."

US trade deficits vs. US household net worth — they’ve risen together over the last half century

From Mark Perry.

"The chart above [I put it below-CM] shows the annual US trade deficit (inverted, right scale, data here) and the annual dollar value of US household net worth (left scale, data here), from 1970 to 2017. As can be seen in the chart, the steady increase in the US trade deficit over the last nearly half-century to a peak of $770 billion in 2006 before falling to an average of $500 billion during the last decade has been accompanied by a steady increase in the value of US household net worth, which has increased more than four-fold in inflation-adjusted dollars since 1970. In 2017, America’s household net worth — the total value of all household assets (real estate, vehicles, stock, savings, mutual funds, bonds, consumer durable goods, etc.) minus all debt (mortgages, car loans, consumer credit, etc.) — rose to another fresh record high of nearly $100 trillion, which is an average of almost $800,000 per US household.

Thanks to the rally last year that brought the stock market to new record highs with a gain of 19.5% from 2016, household net worth rose to nearly $99 trillion last year, which was a $9.0 trillion (and 10.5%) increase over the previous year and the largest one-year dollar increase in history. Not bad. Despite a $570 billion trade deficit last year that Trump is always complaining about and threatening to address because it’s “very one-sided and unfair” and a form of “rape” when it comes to China, the US stock market reached record highs in 2017, bringing the net worth of American households to a new record-high of $99,000,000,000,000.

Over almost half a century since 1970, the correlation between the increasing trade deficit and the rise in US household net worth is amazingly high at 0.92. But according to Trump and his fellow
protectionists scarcityists aren’t America’s $500+ billion trade deficits supposed to be robbing us of our wealth and making us poorer, not richer? The data are telling us that the exact opposite is actually true — that America and Americans keep getting consistently more wealthy over time, despite the rise in the US trade deficit. As Don Boudreaux commented in a post on Cafe Hayek last year (“Tell Me Again Why A Net Inflow of Capital Into America Makes Americans Poorer“) that featured an earlier version of the chart above:

“A rising
U.S. trade deficitU.S. capital-inflow surplus does not mean that Americans are losing net wealth. Quite the opposite, as reality turns out.”"

What Lighthizer Misses On NAFTA

See Lighthizer’s Economics Deficit. WSJ editorial. Excerpts:

"Total trilateral merchandise trade has grown to more than $1 trillion annually from less than $300 billion in 1993.

Enter Mr. Lighthizer’s trade-deficit preoccupation, which holds that unless Mexico buys the same dollar amount of wheat and corn from the U.S. that the U.S. buys in widgets from Mexico, Americans are losing out. This bizarre economics is dangerous to American prosperity.

One of Nafta’s many benefits to American global competitiveness is that it allows U.S. manufacturers to access low-priced intermediate goods from the neighbors, add value in the U.S., and then export the final product around the world. Consumers at home and abroad find these U.S. products attractive because they are well-made and competitively priced thanks to continental supply chains. Workers and wages have benefitted too. The growth of high-paying U.S. jobs in technology, innovation, design and marketing depend on this free-trade web of supply chains.

U.S. car and truck makers benefit in particular from intracontinental trade. Production facilities in all three Nafta countries ship unfinished products across borders, often multiple times, before completion. It is not an exaggeration to say that free-trade access to labor and capital across North America is largely responsible for the survival of the U.S. auto industry. John Bozzella, CEO of the Association of Global Automakers, told Reuters last week that U.S. auto production has increased by more than one million vehicles annually since Nafta and there has been a boom in exports. Whether the industry can survive Mr. Lighthizer is another matter."

"Mr. Lighthizer says he wants to restore jobs that have been lost since 1994 when Nafta was launched. But most of those jobs were lost to technology and higher labor productivity. New employment opportunities depend on new export markets and enhanced competitiveness. Step one is to let go of the obsession with Nafta trade deficits."