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.  

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).

Global Goods Competition

As the US refocuses on the impacts of international trade through the lenses of many trade agreements, it doesn’t hurt to consider from where our competitors are coming. The US wants to reduce, for example, its trade deficit with China. To do that, either China will have to buy more of our goods or we will have to buy less of theirs.

Today I want to focus on US exports of goods to China and the rest of the world. I am ignoring services exports because we have a surplus in our trade with services. Our trade problem seems to reside in goods. The IMF keeps some good statistics on goods trade, and their best database has some nice detail for the years 2013 to 2017. That’s five years – a long enough time for my buddy Nolan to reach his current age of 5 and long enough to draw some conclusions. My main conclusion is that if the US wants to raise its exports, it is not going to be easy.

The table below contains some relevant data on exports of goods. We see that in 2013, the world exported goods whose value in dollars was a bit more than $18 trillion. Since that time, goods exports did not increase; rather, they fell to a level of $17.7 trillion in 2017. The appetite for goods exports has clearly not grown. It fell by almost half a trillion dollars. Let’s agree that with a shrinking pie and a lot of eager-beaver countries, it won’t be easy to expand US exports of goods.

Comparing the next two lines, we see that as of 2017, advanced nations were selling only a bit more than the sum of all emerging nations. It was about a 60/40 split in 2017, and that split reflects the very strong desire of emerging markets to grow through exports of goods. Advanced nations will not give in easily so the future portends a time wherein both advanced and emerging nations will want to compete with the US to supply the world’s demand for goods.

The countries I chose to compare were based on foods that I love. I also chose ones that are major exporting countries and some with which the US might have a special trade relationship. Notice that with the exceptions of China, Mexico, and South Korea, all these countries shared the experiences of declining goods exports from 2013 to 2017. I am guessing that all those countries will try to do the same thing we are trying to do in the US – find a way to export more.

China’s exports increased between 2013 and 2017. China represented about 12% of the world’s exports in 2013. China was the largest country exporter. But notice even China can’t be too happy with its $67 billion increase in exports between 2013 and 2017. That represented a 3% increase in four years or less than 1% growth per year. Mexico’s was larger at 8% over four years or 2% per year. South Korea's increase was less than 4% per year. Those performances are nothing to brag about at the bar at Tacos Guaymas Mexican Restaurant. So even China, Mexico, and South Korea will not relent in their goals to produce and sell goods to the world.

In 2013, the US was the world’s second largest goods exporter and we claimed 9% of the worlds exports of goods. That’s not bad. But as I have said before, our problem with goods trade is not production or exporting. Our problem is our voracious appetite for buying goods.

Data source: http://data.imf.org/?sk=388DFA60-1D26-4ADE-B505-A05A558D9A42

Goods Exports of Selected Areas
2013 to 2017, in billions of dollars
Source: imf.org:
	2013	2017	% of             World	Change
			2013	2013 to 2017
World	18,193	17,702	100	-491
Advanced Nations	10,685	10,171	59	-514
Emerging Markets	7,509	7,136	41	-373
China	2,210	2,277	12	67
United States	1,579	1,547	9	-32
Germany	1,451	1,441	8	-10
Japan	714	687	4	-27
S. Korea	560	574	3	14
Russia	522	353	3	-169
Canada	465	424	3	-41
Mexico	380	410	2	30
India	314	299	2	-15