Is having a trade deficit a problem?
#335
Photog: Good Morning, Economist.
Econ: Good Morning, Photographer.
Photog: I need to talk to you again about Trump's tariff policy.
Econ: No problem for me.
Photog: Trump argues that the world is robbing the USA. He says the huge trade deficits his country has with many trading partners are proof of this. This is why he has raised tariffs. As a form of self-defence. Is he right?
Econ: Can I start at the beginning?
Photog: If it helps the cause.
Econ: A trade deficit occurs when a country imports more than it exports. More precisely, if the value of a country’s imports exceeds the value of its exports, with imports and exports referring to both physical goods and services.
Photog: In the case of the USA, more goods come into the USA than leave the country, right?
Econ: Right.
Photog: So, US-Americans get more than they give.
Econ: They also give something.
Photog: Money?
Econ: Correct.
Photog: This means that when more goods come into the USA, more money flows abroad in the form of US dollars. Because the goods have to be paid for.
Econ: Also correct.
Photog: And what happens next?
Econ: The US dollars flow back to the USA, primarily as investments or loans. This doesn't necessarily happen through the same people. Those who sold the products to the US may exchange the dollars for euros. But they exchange them with those who demand US dollars. And many of these people use the money in the US.
Photog: Once again, US citizens benefit from the money that flows into their country — in the form of cheap loans and investments.
Econ: Again, not just the USA benefits. Their trading partners, too. In a world of voluntary trade, both sides always benefit from a deal; otherwise, that deal simply wouldn't take place. The crucial point is: The counterpart of a trade deficit is a capital surplus. In this sense, there is no deficit. Trade is balanced. You have to look at trade as a whole.
Photog: So why is Trump complaining so much about US trade deficits?
Econ: Primarily to stir up the appearance of conflict and create the impression that he can resolve it to his country's advantage. That's how populists operate.
Photog: And secondarily?
Econ: Trade deficits can sometimes be detrimental in the long run.
Photog: Now things get interesting. In what way?
Econ: If a large amount of capital flows into a country on a sustained basis, this can negatively impact a country's stability.
Photog: Example, please.
Econ: Some East Asian countries ran large trade deficits throughout the 1990s and saw foreign capital pour into their nations. When the Asian financial crisis erupted in 1997 and 1998, foreign investors quickly fled. The results were painful. Recession, job losses, loss of prosperity. This is particularly problematic for small countries.
Photog: The USA is not a small country.
Econ: There can be another problem.
Photog: Tell me.
Econ: Cheap imports from abroad can threaten domestic industries and thus jobs, ultimately even causing them to disappear.
Photog: This is an issue in the USA! Cheap foreign industrial production has killed jobs in the country, right?
Econ: True. But what's lost in one industry is made up for elsewhere by the foreign investments described above. This is also the case in the United States.
Photog: So it is impossible to say clearly whether a trade deficit is good or bad.
Econ: It can be said clearly that fighting a trade deficit with high tariffs is a bad thing.
Photog: Because it inhibits trade and therefore reduces prosperity.
Econ: Maybe you'll become a real economist one day, Photographer.
Photog: Maybe you'll never become a real photographer, Economist.
Econ: You could teach me.
Photog: You could ask me.
Econ: Maybe I will. See you in Democracy, Photographer.
Photog: See you in Democracy, Economist.
Related: Trump’s tariff math is crazy, says ‘Wisdom of Crowds’ author (Politico)