Listening to certain politicians and their advisors, you might think that trade deficits are very bad for an economy.
You might also think that trade deficits are the consequence of bad trade deals, unfair trade practices or countries just not being nice to us.
But if you decided not to think such things, good for you. Because they’re wrong.
How international trade works is widely misunderstood. Most people who get international trade wrong simply start wrong. They begin with the notion that a country in the global economy is “just like” a company competing in the global marketplace.
If one thinks that a country is “just like” a company, then it’s only natural to think that exports are “just like” sales and imports are “just like” expenses. Thus, if exports (sales) exceed imports (expenses), hurray! But if imports exceed exports, oh no, we’re losing!
That, however, is all wrong.
The analogy is wrong. A country in the global economy is nothing like a company competing in the global marketplace.
A company has a bottom line. A company strives for profits, and if it suffers persistent losses, it goes out of business.
A country has no bottom line. For a country, there are no such things as profits or losses. And there’s no such thing as a country going out of business.
For a country, the whole point of international trade is not to export but to import. It’s to get goods that we don’t have and can get at less cost through trade than by making them ourselves.
That’s the point of any trade. Why do we go to the grocery store? To get goods we don’t have and can get at less cost by buying them at the grocery store than by making them ourselves.
Of course, the people we import from want something in return. That’s what exports are for. Exports pay for imports.
To repeat: The purpose of international trade is to import. The purpose of exports is to pay for the imports.
So, you ask, where does the U.S. trade deficit come from?
Foreigners really like our goods and services. In 2017, U.S. exports of goods and services totaled $2.2 trillion. The U.S. exported more goods and services in 2017 than all but seven countries in the world produced in 2017.
But foreigners also really like our financial assets, our stocks and bonds. They also like to build offices and factories here.
Much ado is made about American companies moving production abroad, but there’s much more foreign production that moves to the U.S. than U.S. production that moves abroad. The world’s leading destination of foreign direct investment is the U.S., by far.
Foreigners like our assets more than we like theirs. In 2017, foreigners bought $620 billion more of our assets than we bought of theirs.
How did foreigners pay for all those U.S. goods, services and assets? With exports of goods, services and assets of their own, of course.
But since they bought $620 billion more of our assets than we bought of theirs, they had to pay us $620 billion more of their goods and services than we paid them of our goods and services.
And that’s where the U.S. trade deficit comes from.
So, what’s the problem? There isn’t one.
Reg Murphy Center