Tuesday, September 11, 2018

The Goods Trade Deficit

President Trump has made the US goods trade deficit the center of his economic agenda. He believes that the US is being treated unfairly when it comes to trade in goods. He concludes that this is bad for US workers.

Since international trade is like a giant sausage or at least a meter-long bratwurst, let's try to ignore for a moment most of the aspects of international trade and just focus on the US goods trade deficit. As its name implies, we now focus on only goods. That means for the moment we are ignoring trading of services and various kinds of assets. As Joe Friday used to say, "just the facts on goods ma'am." Okay, he didn't really say that but I had fun saying it anyway. Goods are tangible things that tend to stick with you. So we can begin with sticky buns. Trade in goods includes other tangibles such as agricultural products, autos, trucks, computers, phones, and much more.

The international trade balance in goods equals goods exports minus goods imports. In 2017, the US exported almost $1.6 trillion in goods to other countries. That sounds pretty impressive. But keep in mind two things. First, in 2017 the total amount produced of all goods and services (Gross National Product) in the USA was close to $20 trillion. So in terms of the whole amount of production, goods exports was about 8% in 2017. I would call that peanuts except it might be taken as an insult to peanuts.

Second, we sold $1.6 trillion of goods to people in other countries -- but here's the kicker -- we bought about $2.4 trillion from them. My friend Chuckie T. says that is really cool. We got a lot of stuff, and we didn't have to make it ourselves. But that isn't how President Trump thinks. He would prefer for all that stuff to be made here by US workers. That deficit of about $807 billion is a black eye. It represents to him what the US is losing.

So for a moment, let's stick with the black-eye interpretation. As anyone who has ever suffered a black eye knows, it is not a thing to cherish  It hurts. One must remedy it, but before we start throwing around remedies, let's turn to a bigger picture.

The goods balance has been negative since 1971. I found that information at the US Bureau of Economic Analysis (https://apps.bea.gov/iTable/iTable.cfm?isuri=1&reqid=62&step=2&0=1). I counted on my fingers and concluded that the US has had a goods trade deficit for 47 years. Wow. Turning around something that has been in deficit for 47 years could be quite an undertaking. The plot sickens -- I know it is supposed to be thickens but it really does get worse.

I used a graph from the St. Louis Fed (below) to show the goods trade balance since 1992. Notice some interesting things about that graph. First, the US goods trade deficit gets worse from 1992 to 2017. Second, the only thing that seems to improve the goods deficit is when we have recessions (vertical shaded areas in the graph) in the US that make us poorer and less likely to buy goods (both domestic made and imports). A cynic might conclude that recessions are great ways to reduce goods deficits, but one can plainly see that the remedial impacts of recessions are temporary. And that would be a very painful way to reduce deficits.

Let's suppose you lost undesirable weight gradually over a period of 25 years. We might conclude that extreme diets did not bring about that result. The continued desired loss of weight probably came because you made permanent and important changes in your life. And so it goes with goods trade deficits that have been around for 47 years and clearly worsening for 25 of those years -- there is something fundamental going on. And that something fundamental is not going to be easy to change.

We have had a lot of presidents and congresses in those 47 years, and it is probably true that not one of them organized a party to celebrate larger goods deficits. Yet, despite a lot of talk and some actions here and there, we are here in 2017 with goods deficits that seem to be getting bigger and bigger.

Let's suppose goods deficits are really bad for us. Then perhaps Trump's different approach to goods deficits is worth trying. Apparently his predecessors just made things worse. Their methods might have been sweeter and more humane but let's face it: if this is a problem, then sweetness may not be the best approach. If we want to reverse all those goods deficits, then it may take a fresh approach. You've heard of good cop/bad cop. Maybe it deserves a try.

Let's suppose, instead, that goods deficits are not so bad for us.  Seventy percent of our national output is services. We are very good at making and competing with services. Our services trade balance in 2017 was a surplus of $255 billion. As buyers we want goods and services. As producers we want to make services. So clearly -- we WANT a trade deficit in goods.

We also "export" a  lot of financial and real capital to the world. Maybe we should be focusing more on what we can do (services and assets) rather than what we can't (goods).


9 comments:

  1. Thanks for the cite. But how else can we interpret a goods deficit than we get more than we give? Chuckie T.

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  2. Reading again, how is a goods deficit that lasts 47 years a problem? Is there even a theoretical model that shows it could be a problem? (There has to be some theoretical model somewhere that shows this..)

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    1. You are very welcome. I don't know of any economic models that say that goods deficits are bad. But that is not the end of the story in the real world. Voters and politicians are always keen to things that negatively impact society. So we hear time and gain that many workers were displaced by imports of goods. Another angle has to do with deficits being related to other activities that are not good for the economy.For example, it is well known that countries that do not save, ie, spend too much relative to income, often jeopardize long-term growth. Associated with low saving is a goods trade deficit. So one could say goods trade deficits might be associated with behaviors that harm long-run economic growth. But both of these examples are political issues. They constitute story-telling and prove nothing. But they do seem to impact policy.

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  3. Americans like cheap crap. Just walk into walmart and look at the tags on most items, "Made In China or some other place not the USA". The only way to make cheap crap is with cheap labour which the good ole USA doesn't have.

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    1. Dear MM,

      Apparently Iphones, the love of higher income folks, have a lot of components from Asia and the success of Korean cars suggests non-Walmart sources of demand for foreign stuff. Perhaps this challenge to America has less to do with cheap crap and more to do with America's loss of competitiveness. Are we really so lame that we couldn't find better ways to compete with so called cheap labor abroad? Okay they might have cheaper labor. But doesn't our super smart rich country have advantages to offset all that?

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    2. I would never argue with the Oracle of Economics. I think you made the point. We export services.

      You are right in stating that Iphones arent cheap crap but can you image what they would cost if they were manufactured in the USA?

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    3. Sounds like we might be arguing but in fact are agreeing with each other. A global supply chain clearly benefits most of us. The question is what we should do to help those that don't benefit. We could halt the supply chain or we could find better ways to exploit our considerable comparative advantages. I kinda like the latter and I think you do too. I have never been called an Oracle before. Most people prefer to use the term A-hole. See you at the gym.

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  4. Clearly, Larry, you did not teach Economics at Wharton. Their product reflects the quality of their Econ department and one hopes those profs are long gone...on the other hand, one bad apple, in this case, spoils the pie.

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    1. Read on Bill. Next week I follow up with Goods Trade Deficits Part 2.

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