Why trade deficits aren't automatically bad

[Xiahou]

I've said it before and I'm saying it again: Trade deficits are not always bad and certainly arent the barometer of economic health that the media pretends they are.

Favorable Deficit

[yesdachi]

I think they are a bit more optimistic about a scale that is still rather unbalanced, even after reinvestment, than I am.

[Xiahou]

It's not about optimism or pesimism to me. While the amount we import has grown, our own economic output has also grown at a pace greater than that of our peers. Trade deficits are no more a sign of economic weakness than surpluses are of economic strength.

[Red Peasant]

Hmm, I wonder if you would swallow this if it was a Democratic administration running up such huge deficits?

Somehow, I think not.

[Atilius]

Hmm, I wonder if you would swallow this if it was a Democratic administration running up such huge deficits?

Red,

It's awfully difficult for any administration to control trade balances. It's possible to make the balance of trade more favorable by devaluing the currency or imposing import restrictions, but this causes other problems and invites retaliation from one's trade partners.

The balance of trade is more a result of individual and corporate purchasing decisions.

[Red Peasant]

Yeah, but this reeks of political spin.

[Ice]

I enjoyed this article. This is weird because I was just having a talk about this with a former economics teacher mine. Good stuff. If you have anymore please don't hesitate to post.

Yeah, but this reeks of political spin.

That article neither bashed nor glorified any politcal party. All it did was give a little insight on the economy.

[Papewaio]

Trade deficits are like any debt, they are ok if they are investments which over the long term will pay off (like sending students overseas to learn skills to bring back to a country). However if they are spent on non-productive goods then all they are is a bad debt.

The question then to ask is...is USA's trade deficit caused by the USA investing or by another country investing in the USA or are they bad debt like buying the cheapest consumer goods...like TVs and electronic goods from China.

[drone]

I thought the majority of the trade deficit was cheap good from China and imported oil. If this is the case, then it's probably bad debt, unless the "cheap goods from China" part helps to bring China further to an open system.

[Divinus Arma]

Here's a little interesting factoid about our "trade imbalance" with China:

The Chinese Balance Of Payments is equivalent now to what the BOP was for the region prior to China's rapid growth. China has essentially taken over as the manufacturing center of the region, stealing the show from other such as S. Korea, Japan, et al. The exports from the region are essentailly the same and a look at the current accounts from each country's current account on the BOP reflect this.


In other words, nothing has changed for the U.S., despite the politics of China's growth. We still import a massive amount of goods from the area, just that it all comes from China instead of the imports being regional.

Here is a terrific article from NPR, and offers a completely seperate viewpoint on the issue.

Highlights:

We know the U.S. trade (current account) deficits -- about $650 billion in 2004 -- are filling the coffers of the world's central banks with dollars, so many dollars, in fact, that several key central bankers are saying they have too many and that the United States may not be able, or may not intend, to make good on its international financial obligations. These bankers see that, even if the dollar devalues dramatically, America may no longer have the capacity to raise its exports sufficiently to balance the trade accounts.

Manufacturing, the biggest part of U.S. trade, now accounts for just 12.7 percent of American GDP -- less than health care. Current manufactured exports are about $620 billion while exports of services amount to about $340 billion. To cut the roughly $650 billion trade deficit even in half only by exporting would require more than a 30 percent increase in exports of both manufactures and services. But many of these industries are already running at 80 or 85 percent of capacity. This suggests that when the adjustment comes, it almost surely will be largely through reduced consumption, which very likely means a recession if not worse.

Well reasoned, indeed. The issue is not the growth of China, but the weakening of the U.S. economic engine. We are losing our economic advantage because of internal forces, not external forces. Furthermore, Democrat economic strategy will make the situation worse. #1, a raise in the minimum wage would cause instant inflation as small businesses raise prices to meet the new salary obligations. #2, Leftist-leaning economic theory counts government spending as part of the GNP, so gov spending is always seen as a good thing for the economy. But the government isn't supposed to be a primary economic driver! They will raise taxes in order to pay for spending, which will further hurt the private sector and our international competitiveness. The consequence will be further offshoring or domestic isolationist policy, screwing us out of the free trade global bonanza.