The insignificance of trade deficits

Originally published by Gwayne Gautreaux in the Daily Comet on July 31, 2019.

Nothing has been politicized more and understood less than the effects of trade. Misaligned trade policy is the one component of “Trumponics” that threatens to send the economy into a tailspin. President Trump continues to propagate his attack on free trade by citing the nation’s trade deficit as a way of convincing voters that the U.S. has been victimized in the global market. Consequently, this antiquated way of thinking is rooted in a common fundamental misunderstanding of the way capital flows throughout the world economy. Additionally, it’s also a way of justifying the provisions and protections granted to special interests.

The metrics recorded from the balance of trade neglect to capture all the ways Americans profit from cross-border commerce. The gains from trade will generate, on aggregate, a lower cost of living, higher standard of living and subsequently more disposable income, regardless of whether the U.S. buys more from abroad than it sells in return.

Members of the Trump administration have persistently sought ways to contract the trade deficit by renegotiating what they perceived to be deficient trade deals that allowed dollars to leak out and flow abroad. Although this may seem like an intuitive response, the president’s policies alternatively impede the flow of capital reciprocated from the trade deficit, which is indicative of an administration that continues to undermine the way the global economy operates.

In the first place, dollars spent abroad will most definitely return as capital surplus. The trade deficit does not occur in a vacuum, nor is it the result of sub-optimal trade deals but rather from the macroeconomic effect of Americans having artificially low savings with a much higher rate of investment demand. Interest rates have been artificially low, which has induced more borrowing than savings. Domestically, investment should be offset by national savings; yet because the country’s savings rate is much lower than the rate of investment, the foreign surplus of savings abroad must subsidize the domestic surplus of investment demand. Therefore, when foreigners acquire American dollars, they will either invest in valuable U.S. assets or trade with others who desire the same. Of course, foreigners have the option of burning their dollars or keeping them under lock and key — both of which would be optimal for Americans, since printing green pieces of paper can be done at a very low price.

However, dollars spent abroad will not be kept in hiding or mysteriously disappear because recipients will never deprive themselves of their purchasing power. Moreover, the dollar will gladly be accepted as reserve currency by just about any country in the world. Paper money is only as valuable as the assets it can buy.

The point is, the trade deficit is financed by a capital surplus, where dollars spent abroad will eventually return as foreign investment, some as debt but most as sources of equity, all of which support jobs, income and economic growth.

The country is currently experiencing a decade of record expansion. International trade policy based on misguided negligence could undermine domestic well-being, which can ultimately destabilize the global market and force the economy into contraction. Because the U.S. will remain a profitable investment haven, domestic currency will universally be sought-after, thereby rendering the trade deficit an inconsequential and insignificant measure of global commerce.

Gwayne Gautreaux studied international political economy through Penn State’s World Campus and has researched trade, foreign policy and economic indicators that predict market outcomes. He operates a political blog at gwaynesworld.com. He resides in Galliano.