Negative Balance of Trade? So What?

[Cyber Liberty]

Robert Higgs
Monday, May 01, 2017

The tendency of the USA to have a negative balance of trade (more accurately known as a negative balance on current account) played a prominent role in the recent U.S. presidential campaign. Donald Trump criticized this tendency repeatedly and promised that if elected he would take various actions to reduce or eliminate it. Like most members of the public, Trump views this negative balance as a highly undesirable, economically damaging condition. Despite the prominence of discussions of the negative balance of trade in recent times, however, it is likely that few people really understand much if anything about the system of international payments accounts from which it derives.

The world would have been a happier place had international payments data never been devised.

Fortunately, interested parties can learn what they need to know about the international payments accounts by studying the documents that accompany the Bureau of Economic Analysis’s presentation of the data or by reading almost daily commentary on this topic by first-rate economists. My own go-to source of sound economic interpretation of this subject is the commentary by Donald J. Boudreaux at the blog Cafe Hayek.

Read More at FEE.org:  https://fee.org/articles/negative-balance-of-trade-so-what/

[Free Vulcan]

Except for the fact of the huge currency swap that is ever winding up between us and China. We buy their stuff export our dollar overseas, they invest those dollars back into our financial markets.

Should that gargantuan bubble of a swap ever break, such as the dollar no longer being the reserve currency, our money and financial assets get dumped at a steep discount. That will likely bring down both us and China, and a better than average chance of the rest of the world too.

[driftdiver]

Lets see, if you have more money going out then coming in that seems like a bad thing.   Unless you have interests in China of course.

[Cyber Liberty]

Lets see, if you have more money going out then coming in that seems like a bad thing.   Unless you have interests in China of course.

What if:  For every dollar we get from China, we send two dollars to China; for every dollar China gets from Europe, they send two dollars to Europe; and for every dollar the US sends to Europe, Europe sends two dollars to us? 

Sounds like a lot of imbalance but looked at as a group, there's no trade deficit.  I've over simplified it, but the point is one cannot look at the trade imbalance between two nations only and get a complete picture of either economy.

[thackney]

What if:  For every dollar we get from China, we send two dollars to China; for every dollar China gets from Europe, they send two dollars to Europe; and for every dollar the US gets from Europe, Europe sends two dollars to us? 

Sounds like a lot of imbalance but looked at as a group, there's no trade deficit.  I've over simplified it, but the point is one cannot look at the trade imbalance between two nations only and get a complete picture of either economy.

How about when we look at the trade imbalance for US versus all countries?

In 2016, the total U.S. trade deficit was $502 billion. That's because it imported $2.712 trillion of goods and services while exporting $2.209 trillion.

https://www.thebalance.com/u-s-trade-deficit-causes-effects-trade-partners-3306276

An ongoing trade deficit is detrimental to the nation’s economy because it is financed with debt. The United States can buy more than it makes because it borrows from its trading partners.

It's like a party where the pizza place is willing to keep sending you pizzas and putting it on your tab. This can only continue as long as the pizzeria trusts you to repay the loan. One day, the lending countries could decide to ask America to repay the debt. On that day, the party is over.

[Free Vulcan]

It all rests on the dollar as the world reserve currency. If that would ever cease, then it all comes crashing down.

Having so much debt that rising interest rates would make it difficult to make the interest payments out of tax receipts, as well as pay for our bloated entitlement economy, is one example of how we might no longer be the reserve currency.

[Cyber Liberty]

How about when we look at the trade imbalance for US versus all countries?

In 2016, the total U.S. trade deficit was $502 billion. That's because it imported $2.712 trillion of goods and services while exporting $2.209 trillion.

https://www.thebalance.com/u-s-trade-deficit-causes-effects-trade-partners-3306276

An ongoing trade deficit is detrimental to the nation’s economy because it is financed with debt. The United States can buy more than it makes because it borrows from its trading partners.

It's like a party where the pizza place is willing to keep sending you pizzas and putting it on your tab. This can only continue as long as the pizzeria trusts you to repay the loan. One day, the lending countries could decide to ask America to repay the debt. On that day, the party is over.

I made a typo about the flow of trade between the US and Europe, but it has no impact on the meaning of your post.  Sorry.

[Joe Wooten]

Except for the fact of the huge currency swap that is ever winding up between us and China. We buy their stuff export our dollar overseas, they invest those dollars back into our financial markets.

Should that gargantuan bubble of a swap ever break, such as the dollar no longer being the reserve currency, our money and financial assets get dumped at a steep discount. That will likely bring down both us and China, and a better than average chance of the rest of the world too.

Despite the rise of China over the last 20 years, the US is still the world economic engine. When it goes, and it eventually will, the rest of the world will be in really bad shape. If we catch a cold, they still get pneumonia, except for China, which gets a worse cold.