One problem is that of distribution. Many Chinese families are seeing their livelihood improved by the "underwear" jobs. However, a small group of US families are profiting from the sales of "satellites".
2nd problem is we're buying $336 billion more underwear than selling satellites. At some point we have to have a balanced flow or we'll go broke.
Except, and this point gets bungled in the media all the time, the trade deficit doesn't matter. There are some economic reasons (the entire world's currency is based on the dollar) and there are some political reasons (all countries benefit from the free movement of goods so anyone trying to force a balancing would be ostracized), there is also the fact that the US military is strong enough to defend against seizure but, here are the two really big reasons you should walk away with:
1. We are no longer on a precious metal standard so there is no limit to the supply of money.
2. States don't do business with states, individuals do business with individuals - you, personally, likely have a severe trade deficit with Apple (or your computer vendor of choice) you have purchase their services for money but they have never directly purchased yours. This does not matter you are at a deficit and surplus with a variety of players and the world keeps on turning.
The U.S. balance of goods and services trade is one component of a complex economy. Of course it matters, but the simple balance does not imply that it's a bad thing, or that it will harm the U.S. economy in the short term or long run.
> Yes, but I do not have a trade deficit on the whole as well.
Presumably you mean that you add net value to your wealth each year, despite having a "trade deficit" on most economic relationships. Well, so does the U.S. The net change in the national income is called GDP growth and it is mostly positive in spite of the negative balance of trade.
Why? Because the U.S. economy is primarily internally driven; trade is only about 15% of GDP. So more important than the balance of trade is how that trade impacts the domestic economy.
Would we experience even more economic growth if we had a positive balance of trade? Maybe. If we kept imports the same and grew exports, that would be great, but that will either happen or not based on private industry. The government does not have a magic lever to create new exportable goods and services.
But the government does have a variety of levers to reduce imports, some of which it is pulling right now. To predict the economic effects, it's not enough to just look at the balance. You would need to untangle the domestic effects of reducing imports that may be inputs to domestic economic growth. It's certainly possible to use trade restrictions to create a positive balance of trade, and create negative GDP growth at the same time.
> Because the U.S. economy is primarily internally driven; trade is only about 15% of GDP. So more important than the balance of trade is how that trade impacts the domestic economy.
That's almost scarier, really. It's a big shell game with money just moving in circles.
Not at all (inherently). Most economies have traditionally been internally driven with a lot of wealth production from agriculture, raw material gathering and the finishing of those materials - it's only in the industrial era that we saw the export of goods for finishing in other countries emerge as a thing that could occur. But, if some rare earth minerals are imported into Fakistan and then turned into an iPhone - then the labour exchange to add that value would be within the "internally driven" header mentioned above... as that's value that's been created domestically and can either be used to exchange for new goods abroad (where it becomes a trade deficit) or else just consumed domestically.
> Yes, but I do not have a trade deficit on the whole as well.
Yeah you (as in, most people) do, people just call it a mortgage, a car payment etc.
I.e. they enjoy the present-day use of assets whose total price today is something they'll be paying for down the line, because they think having them today will contribute to their future growth.
The exact same logic is at play when countries decide to indebt themselves. Public debt just amounts to borrowing from the future.
There's plenty of articles explaining why deficit is not a problem, but despite of all the economic theory I find this view very weird. In the bottom line, if you're consuming more than you're manufacturing, mostly likely you're in trouble.
>If you consume more than you produce, you're creating a debt. Sooner or later this debt should be paid.
Few things: firstly, trade imbalance is not debt. That is a gross oversimplification of the macroeconomy.
Secondly: debt repayment doesn't even guaranteed with personal debt (bankruptcy, for example, discharges personal debt). The state has mechanisms for discharging debt available to it that personal debtors do not have.
Not all consuming is importing, and not all production is exported. This distinction is actually crucial. The balance of trade is only one part of a bigger picture, the other is domestic production and consumption. You can't understand one without also factoring in the other.
If a country has a very productive, vibrant and innovative domestic economy, it can increase the value of it's domestic net assets. It generates valuable new technology perhaps, it finds ways to maintain it's standard of living using fewer resources, or simply increases it's standard of living at current prices. It becomes a wealthier nation, without trading externally at all. Maybe it even attracts foreign investment.
In 2018 the US trade deficit was $890m (10% higher than 2017, thanks Trump), but it's GDP growth was $1trn.
If internal activities increase the value of the domestic economy by more than the trade deficit, then the trade deficit really doesn't matter. It's already paid for.
Finally, the only way to buy goods abroad is for someone to sell your currency and buy theirs. If you're buying more abroad than people buy from you, the balance is exactly equal to the 'deficit' in trade of your currency. Well, nobody is forcing anyone to buy your currency but if they do that's implicitly an investment in your economy.
It's been increasing dramatically since the early 80's, regardless of who has been president. So I'm sure you meant thanks {Carter, Reagan, Bush, Clinton, Bush, Obama, Trump}.
> If internal activities increase the value of the domestic economy by more than the trade deficit, then the trade deficit really doesn't matter. It's already paid for.
I'm not sure what you're trying to argue for? Are you saying we should ignore things as long as we can afford them (so there's no reason for rich people to insulate their houses or close their windows, so long as they can keep paying their electric bill), or that there's secretly some benefit of running trade deficits as long as you can afford them? To me this sounds like the captain of a boat denying that a huge hole in the boat is a problem so long as the water gets pumped out slightly faster. The thing is if you are a net exporter you are getting richer, and if you are a net importer you are getting poorer (richer and poorer than you would have been otherwise). If you live in some bizarro universe where that isn't true, explain why companies keep trying to sell us stuff? Why do farmers try to sell more corn than they buy for seed every year? Why does China, and every other country, try so hard to stay competitive and increase their exports? The answer is as obvious as it is true, whatever other wealth you generate, if you export goods you get that money too, just like the rich guy who insulates his house gets to keep his rich guy bank account AND the amount he saves on his bill every month.
> Finally, the only way to buy goods abroad is for someone to sell your currency and buy theirs. If you're buying more abroad than people buy from you, the balance is exactly equal to the 'deficit' in trade of your currency.
This makes the opposite point of what you are trying to make. There is a net flow of funds towards China. That means China is holding USD, which means our currency is made more valuable and their currency is made less valuable, since we have less dollars in circulation domestically. This makes our exports more expensive in terms of foreign currency, which means we sell less stuff to every country, and especially to China. Meanwhile having a currency that actually gets more valuable is an economic disaster, it will throw the country into depression if left unchecked (if you don't know why then you shouldn't be commenting on economics: https://www.economicshelp.org/blog/978/economics/definition-...). So we have to print more money to keep the value of our currency stable, so the effect of 'china's investment' is exactly nothing, apart from China building up huge wealth exporting to the US and the US not building up wealth exporting to China.
Deflation is falling prices inside your economy, as valued in your own currency. It's got nothing much to do with external exchange rates in other currencies.
Yes it makes stuff bought from abroad cheaper, but maybe your domestic economy doesn't compete in those goods? In which case who cares, you just get more stuff for less. It also means inputs into your own manufacturing from abroad are cheaper, so you can capture more value add.
Deflation is a problem only when it affects the economy as a whole, because it means wages get depressed and investment dries up, but it's usually an effect of those things as much as a cause. Individual goods getting cheaper happens all the time, and it's great. The entire computer industry is an example of a whole economic sector built on deflation.
So you don't know the difference between the national debt and US-China trade deficit. Please continue to share your extremely valuable insights into economics.
Or you consume more than you produce, and output other forms such as debt or a lower dollar, so foreign companies will day be able to purchase things you’ll produce in the future. So everything balances out it the end, doesn’t it?
It only doesn't matter until all of a sudden it does. The global economy is constantly in flux. It might not be too long before a majority of countries decide it's in their best interest to not use the USD for international settlements and when that happens the bubble pops big time.
To further that point, when country X does not respect country Y's copyrights and begin undercutting country Y's market for those items, it creates a further imbalance.
2nd problem is we're buying $336 billion more underwear than selling satellites. At some point we have to have a balanced flow or we'll go broke.
https://en.wikipedia.org/wiki/China%E2%80%93United_States_tr...