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Don't Worry about the Trade Deficit

June 6, 2017

J: President Trump and some of his key advisers, most notably Commerce Secretary Wilbur Ross and Director of the White House National Trade Council, Peter Navarro, love to complain about “unfair trading partners” of the US.  They also wring their hands over the trade deficit.

 

On June 2, the Census Bureau released data for trade in goods and services for April.  During April, the US exported $191.0 billion of goods and services and imported $238.6 billion, both seasonally adjusted.  That resulted in a deficit of $47.6 billion.  The deficit on goods along was $68.4 billion; the surplus in services was $20.8 billion.

 

The following chart shows the total deficit from the beginning of 1992 through April.  Note how the deficit kept getting bigger until the last recession.  It’s been pretty consistently in the $35-$50 billion range every month since the beginning of 2010.  That would appear to be a sustainable trend.

 

This second chart shows the ongoing surplus in services.  This sector includes movies and television shows, banking, education, insurance, legal, licensing, software, and transportation service among other types of services.  For example, most people don’t realize that when a student comes from another country to get a college degree at a US university, she or he is importing educational services, even though those are provided in the US.  Note that the surplus on services has hit several record highs in recent years.

 

 

There is an iron law of accounting that every country must have the same balance of payments, which is zero.  If a country has a trade deficit, like the US does, then it must have an equal and offsetting inflow of foreign capital.

 

Foreigners love to invest in the US.  We have strong property rights, the largest and most liquid capital markets in the world, and a highly-skilled and well-trained labor force.  Nations with trade surpluses must invest in other countries and a great deal of that money flows into the US because we are perceived as a safe haven for investment. 

 

L:  This sounds like a good thing, right?  We buy more stuff from other countries, which generally keeps prices lower for US consumers, and then they invest money into our economy. 

 

J:   So, the next time you hear someone complaining about our trade deficit, tell them that just means foreigners are investing more here.  Since that means lower interest rates and more good jobs for people living in the US, you should tell them to celebrate our deficit on goods and find something else to worry about.  (We’re talking to you, Mr. President.)

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