Tuesday, September 18, 2018

The Goods Trade Deficit Part 2

Last week I discussed the persistent US international trade deficit in goods. I concluded with two points. First, if the goods deficit really is a bad thing, a new approach might be necessary now after 47 years of trying has only made it worse. Second, I suggested that the goods deficit might not really be such a bad thing and that we might focus our policy efforts elsewhere. To make this second point I briefly made some points about trade in services and various assets.

This week I’d like to follow up with the idea that the trade deficit might not be such a bad thing.

To start with, discussions of US International Trade are supported by figures collected by the US Bureau of Economic Analysis and found in what is called the Balance of Payments (BOP). That’s a very misleading term and ought to be replaced by something like Stuff People Don’t Know about International Transactions (SPDKIT).

Even if this is likely to put the Tuna to sleep and cause Nathan to hyperventilate, I am going to educate you goonies about the BOP. I will do this with the below table which reports results for 2017. Once everyone is totally asleep I will then come back to the reason why all this supports my idea that the goods deficit is not such a horrible thing.  

First, the goods deficit of  ($808) billion is shown at the top of the table.

Second, just below the goods numbers are the services numbers. While some people like to say services can be aptly defined by what people at McDonalds do, services is a much broader category with some very sophisticated outputs and very high wage inputs. Services include at least the following industries – travel, transportation, finance, banking, education, retail and wholesale trade. Services account for about 70% of the US national output of about $21 trillion dollars. Notice that we had a trade surplus in services of $255 billion in 2017.

Third, the US is actively engaged in buying and selling financial assets. For example, Germans buy US government bonds and US citizens buy stocks of British companies. The table lists three types of cross-country investments which show purchases of Financial Portfolios, Bank Loans and Deposits, and Direct Investments. Financial Portfolios relate mostly to when we buy each other’s stocks and bonds. Direct Investments are when we buy each other’s companies. Loans and Deposits are self-explanatory.

Adding together the balances of these three financial accounts gives you a total surplus of $353 billion. Adding together the surpluses of these three plus services gives you a total surplus of $608 billion.

Tired of adding and subtracting?

One point of this exercise is that there is much more to international trade than goods imports and exports. Clearly a goods deficit of more than $800 billion has negative impacts. It does directly impact employment and it does manage to send US dollars out of the US. But a surplus in services does just the opposite. It increases jobs in the USA and it brings dollars back into the USA.

The story is similar for trade in assets. The financial surpluses show that foreigners love adding US bonds and stocks to their portfolios and they love buying ownership positions in US companies. The benefits should be obvious. When they buy ownership in companies they make it easier for these companies to raise money for investment purposes.

When foreigners buy US bonds and stocks they strengthen these markets too. As they drive stock prices up they lower the cost of capital to firms. As they buy government and private bonds they lower US interest rates and reduce the US cost of capital.

This latter point is more important than one might think. In the US we don’t love to save. We love to spend. As a result, capital is scarce and the cost of capital is higher than it should be. As foreigners bring their savings to the US they augment or pool capital and make it easier and less costly for us top borrow and invest.

This is getting a bit long so let’s wrap up. There is more to trade and to US health than goods. If we worry too much about goods we might threaten these other valuable activities. If bad policy on goods trade makes foreigners move their savings away from the US, then a lot of Americans will suffer as the stock market swoons and the cost of capital rises. Finally, global competition for US goods is not going to end with China. So long as developing countries want to compete with us and so long as their workers make only fractions of what our workers make, we will have a difficult time competing with them. Rather than bring all this activity home we should decide what we do best and what will sustain our workforce in the decades to come. 

Table (In billions of dollars)

Exports of Goods                              1,553
Imports of Goods                              2,361
     Goods Balance                                    (808)

Exports of Services                              798
Imports of Services                              543
     Services Balance                                  255

US Portfolio Investments Abroad       587
Foreign Portfolio Investments in US  799             
     Portfolio Investment Balance            212

US Loans/Deposits from Abroad       219
Loans/Deposits to Foreigners in US  384 
     Loans/Deposits Balance                     165

US Direct Investments Abroad          379
Foreign Direct Investments in US     355
    Net Foreign Direct Investments        (24)

NOTE: This presentations leaves out several smaller items that compose the US BOP Accounts so that we can concentrate on the main items. This presentation also does not mention that some of these items are part of the Current Account while others are part of the Financial and Capital Account.  


  1. Since you mention interest rates I am wondering what you think about the current interest rates; both for saving and borrowing. I have to say it makes little sense for me to save when even CDs have interest rates of less than 2%. My take is that interest rates for borrowing are also artificially low, IMHO to heat up the economy.

    As for foreign countries/people investing in the US I am not so sure it is due to the strength of the US economy; rather due to the weakness of all other economies big enough to attract investment.

    While I agree the US is the first choice for global investment it is more of a case of the US being the biggest midget in the circus.

  2. Dear Rage,

    Agreed on all you say. Low interest rates guarantee low saving and higher demands for borrowing and risk. If and when other countries get over their current woes, the flows of global investment will return. In the meantime we benefit from a flood of world investment flows.