Subscribe to Stingray's FeedThe idea of our growing American trade deficit being a bad idea is overblown. This is how it works: we send dollars to China and get lots of bling in return. We’re essentially farming out low-paying jobs to developing countries while we concentrate on the higher-paying jobs.
The sad thing (depending on how you look at the issue) is that cheap bling will be a thing of the past in 25 years or so when the Asian economies are fully developed. I’m old enough to remember when all the cheap stuff in stores had “Made in Japan” stamped on it. Now, when you buy something that says “Made in Japan” it’s more likely to be a car or a plasma TV.
Yes, because of the trade deficit we send US dollars out of the country. But we get things we want in return for prices that are impossibly lower than they could be if they were made in the United States.
According to the Cato Institute:
Economic theory and experience show that trade deficits are driven by levels of national saving and investment in the U.S. economy, not by allegedly unfair trade barriers abroad or by declining industrial competitiveness at home. America’s record trade deficit is a symbol of economic strength, reflecting a strong net inflow of foreign investment drawn to America’s dynamic economy.
Growing trade deficits signal improving economic conditions, while shrinking deficits often occur in times of economic trouble. During the last 25 years, the U.S. economy has on average grown about a percentage point faster, 3.5 percent vs. 2.6 percent, in years when the trade deficit expanded compared with years when it shrank. The unemployment rate on average fell 0.4 percentage points during years of rising deficits and rose 0.4 points when the deficit shrank. Manufacturing output rose much faster during years of rising trade deficits than during years of shrinking deficits.
America’s largest trade deficits in recent decades occurred during economic expansions, its smallest deficits during recessions. It’s no coincidence that as the economy shows signs of slowing down, the monthly trade deficit numbers have also begun to shrink with the economy’s growth rate. (Those critics who demand that something be done to “fix” the trade deficit should be concerned that they might get what they ask for.)
Critics of trade liberalization often point to the trade deficit as proof that trade destroys jobs. If exports create jobs, they argue, then surely imports mean less domestic production and fewer jobs. In fact, imports and domestic production rise and fall together. Since 1987, manufacturing output in the United States has risen the fastest during years when the volume of imported goods has also risen the fastest. The two years of slowest import growth, 1990 and 1991, were the only two years in which manufacturing output actually fell. The same economic expansion that spurs manufacturing growth also attracts more imports and enlarges the trade deficit.
Plus, don’t forget that a huge amount of the money that we send overseas is re-invested back into the American economy in the form of buying Treasury Bonds or stock in US companies. As of today, Japanese Treasury Bonds have yields ranging from 1.4% to 2.32%. Compare this with today’s news that 10-Year US Treasury Bonds are currently yielding 5.02%, the highest since June, 2002.
If you’re a company in China or Saudi Arabia with a lot of extra dollars, where are you going to invest them, Japan or the United States? Foreign countries have $1.5 trillion invested in the US economy, with about half of that not in debt — as in US Treasury Bonds — but in equities like real estate and corporations. The Cato institute says that “net payments to finance our foreign “debt” were less than $20 billion in 1999, about one-fifth of one percent of GDP.” That’s an insignificant portion of our economy.
The bottom line is that our trade deficit is not a bad thing, but rather a sign of a strong economy.
Without talking about it too much with anyone before, I've long believed most of the things you say here. It seems to me that all a trade deficit means is that we are another country's customer. To me, that creates a chance for peace, since most people don't want to bomb their best customers.
One thing I would disagree with is your prediction that when the Asian economies develop, we'll no longer have a source of cheap goods. I think Asian entrepreneurs will do the same thing America did when our economy developed - they'll look for cheap labor elsewhere.
Wrong. Our trade deficit is a bad thing. It is sign that U.S. exports cannot compete with those from China, Japan and Germany.
Those three countries are the ones with the strong economies because their share of world exports are growing. The U.S. share is holding constant. Combine a constant share of world exports with a growing share of world imports - you get a large trade deficit.
A trade deficit means foreigners have the dollars to buy things of value in the U.S. that are for sale - such as The Wall Street Journal, Crysler motor company, etc. If the U.S. had the dominant economy we used to have, the U.S. banks would not have gone hat in hand to sovereign wealth funds to boster their capital.