The US trade deficit is tribute paid to foreigners. And it’s big.
Tuesday, February 3, 2009 at 05:09PM
Skeptic in Free trade, Globalization

In 26 of the last 27 years, the US has run a trade deficit.

US current account trade surplus or deficit as percent of GDP 1960 to 2008

Trade data and GDP data from US Bureau of Economic Analysis.

When the US exports less in goods and services than it imports, and earns less from its investments abroad than foreigners earn on their investments here, there is increased debt to foreigners, which must be serviced and eventually paid off, and/or transfers to foreigners of title to US assets such as company stock and real estate. Effectively, it's as though foreigners collected a sales tax on all economic activity in the US, essentially a tribute paid by the US to foreigners. The rate has been as high as 6.0 % of Gross Domestic Product, was about 4.9% in 2008, and has averaged 2.9% since 1981.

In 2007, the total tribute paid was $731 billion. That's larger than the Troubled Asset Relief Program ("TARP"), which may take more than a year to disburse. It's almost as large as the multi-year economic stimulus package pending in Congress now. It's larger than all US federal spending on defense in 2007 and more than twice as large as all federal non-defense spending. (BEA link.) It is almost twice as much as federal corporate income taxes in 2007. (Tax Policy Center link.)

The comparative advantage argument for trade liberalization assumes imports and exports will be balanced. (There is a theory about how currency exchange markets will automatically result in balanced trade, but obviously the theory is not operating in the real world.) On the other hand, the older mercantilist idea that national wealth accumulation comes from maximizing exports and minimizing imports has worked splendidly for China in recent years. The US has neither balanced trade nor a trade surplus but, instead, has run a large chronic trade deficit—and there is no reputable theory predicting net benefits from that.

Despite this, free trade ideologues are wringing their hands about the possibility that new political winds may blow in a wave of protectionism. Although it would be unfortunate for the US to adopt illegal tariffs in the name of ending the recession, US trade policy has been broken for 2 to 3 decades and needs a major overhaul. We should start now, not because we are in a recession, but because changes are long overdue.

Fortunately, the recent conventional wisdom that all trade liberalization is good and inevitably produces good results has been shattered. Nobel laureates Paul Samuelson and Paul Krugman and other prominent economists including Dani Rodrik, Alan Blinder, Martin Wolf, Larry Summers, Joseph Stiglitz, and even Alan Greenspan have said that the US middle class is net worse off as a result of the way we have implemented trade liberalization. We need to take a strategic approach to foreign trade and work hard to get the potential net benefits for middle class Americans.

Update on Monday, March 16, 2009 at 01:41PM by Registered CommenterSkeptic

There is a point of view that America does not need to manufacture things--we can import substantially all manufactured goods and earn the necessary foreign exchange by exporting services. Dean Baker points out the math makes that utterly implausible.

The end of manufacturing school argues that we will pay by exporting services. This is where arithmetic is so useful. The volume of U.S. trade in goods is approximately three and half times the volume of its trade in services. If the deficit in goods trade were to continue to expand, we would need an incredible growth rate in both the volume and surplus of service trade and our surplus on this trade in order to get to anything close to balanced trade.

For example, if we lose half of our manufacturing over the next twenty years, and imported services continue to rise at the same pace as the past decade, then we would have to see exports of services rise at an average annual rate of almost 15 percent over the next two decades if we are to have balanced trade in the year 2028.

A 15 percent annual growth rate in service exports is approximately twice the rate of growth in service exports that we have seen over the last decade. It would take a very creative story to explain how we can anticipate the doubling of the growth rate of service exports on a sustained basis.

The story becomes even more fantastic on a closer examination of the services that we export. The largest single item is travel, meaning the money that foreign tourists spend in the United States. This item alone accounts for almost 20 percent of our service exports.

Baker goes on to identify the kinds of services the US has been exporting and discusses the bleak prospects for rapid expansion in those categories. 

Thanks to Mark Thoma for the link.  He has commentary here.

Update on Thursday, March 26, 2009 at 10:11AM by Registered CommenterSkeptic

Brad DeLong said 6 years ago that some trade deficit may be OK, depending on the reasons for it.  He regrets that he does not know what portion of the recent US trade deficit is troublesome and what portion is not. 

He says one thing we should not worry about is foreigners holding US securities because they think those are safer and/or because their families might want to move here.  However, DeLong admits that would turn troublesome if foreigners start moving their savings to a new favorite country.  He doesn't address the issues of the continuing drain of wealth into foreign hands or the stagnation of the parts of the US economy that depend on exports.

Update on Saturday, May 2, 2009 at 08:31AM by Registered CommenterSkeptic

The New York Times has a similar graph back to 1947, and imports and exports each seperately here.

Update on Friday, October 30, 2009 at 12:18PM by Registered CommenterSkeptic

I should have mentioned that the official gross domestic product ("GDP") is also reduced dollar for dollar by net imports.  This is a consequence of the GDP formula itself:  GDP = consumer spending + gross private investment (not net of depreciation/amortization) + government consumption and investment (but not transfer payments) + net exports.  So when net exports have averaged -3%, that means foreign trade reduced GDP by 3%. 

This arithmetic also illustrates why many nations, including China and the other Asian nations with which the US runs a chronic trade deficit, have a deliberate (and successful) strategy of "export-led growth."  Their net exports lead directly to increases in their own GDP.  In contrast, one might say the US has an "import-led growth strategy," but that's an oxymoron.  Thomas Palley was wondering in 2006 why nobody would talk about this at a conference of the prestigious Institute for International Economics. His answer:

That brings us back to the opening conundrum. Why no mention of export-led growth? One reason is that trade is a touchy subject in Washington, and trade has enough problems without being tied to global financial instability. Export-led growth also shows that trade is not a level playing field, confirming critics' claims about countries manipulating exchange rates and pursuing mercantilist policies that subsidize their manufacturers. Finally, the export-led growth story implies the US is relying on import-led growth that sacrifices the manufacturing base, which is a doubtful long run national growth strategy. So why do people ignore the elephant? To quote Bill Clinton, "Denial. It's not just a river in Egypt."

Article originally appeared on realitybase (http://www.realitybase.org/).
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