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8 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and other Egghead
Stuff devotes his trusty slide rule to correcting the mainstream media’s icky
math regarding America’s global balance of trade deficit.
(read further for commentary on trade figures)
$739 BILLION (reported merchandise balance deficit)
-$232 BILLION (services account surplus)
-$212 BILLION (investment income account surplus)
-$226 BILLION (benefits from global reserve dollar)
TOTAL: $69 BILLION (balance of trade deficit, adjusting for
reserve dollar benefits)
(source: BEA and US Commerce Department, 2011-2015 average
current accounts and B. Eichengreen's "Exorbitant Privilege," read further for commentary on trade figures)
_______
The CO Correspondent for Economic Affairs (COCEA) would
first like to say that he believes China does use underhanded and mercantilist
tactics to boost its exports including foreign currency exchange interventions,
import quotas, and theft of intellectual property.
The COCEA also believes the Chinese Communist Party uses
these tactics to maximize domestic employment out of fear that it could be
overthrown politically should it cease to deliver the economic goods to China’s
1.3 billion citizens.
Since China alone represents the disproportional bulk of
America's merchandise balance deficit, removing China from the calculus leaves
the rest of the collective globe in a near-equilibrium position with the United
States.
But the highly-publicized "$739 billion trade
deficit" is an incomplete and ultimately deceitful statistic meant to
alarm Americans into believing the world is "ripping us off." In
fact, with the exception of remittances, the big-picture U.S. “balance of trade
deficit” is very close to zero.
The $739 billion merchandise trade deficit that is reported
in the news refers only to goods. These can be manufactured such as cars,
televisions, clothing, etc... or goods that don't come from factories like
agriculture or media.
However what isn't included in the $739 billion figure—just
for starters—is the American services account surplus.
Normally when people think of services burger flipping jobs
come to mind, but in the theater of global trade the U.S. exports finely tuned
professional services in finance, consulting, architecture, design, and
engineering as well as education or travel.
For example, if a foreign student comes to the United States
and pays tuition at a university, he helps America run a service account
surplus. If an overseas tourist flies to the United States to visit the Grand
Canyon or New York City and spends money with hotels and tour companies, he
helps America run a service account surplus—especially if he flies a U.S.
airline.
And the kinds of jobs that U.S. workers perform exporting
services are generally higher-skilled and higher-paying than manufacturing
jobs. In other words, services jobs are precisely the kind of jobs we want in
America if we are to maintain a high standard of living that the rest of the
world is willing to pay us handsomely for.
Hence it's no coincidence that as a nation gets richer, more
and more of its jobs move to the service sector—because the world is simply
unwilling to pay the big bucks just for manufactured products. The USA runs an
approximate $232 billion services account surplus with the world because we're
very good at what we do.
***So the first amendment to the $739 billion merchandise
trade deficit is to adjust for America’s $232 billion services account surplus.
The “trade deficit” is now whittled down to $507 billion.
_______
Then there's income on assets held abroad. U.S. citizens and
institutions hold about $23 trillion in foreign assets abroad. Yet foreigners actually
hold more—about $28 trillion—in U.S. assets.
All these assets earn investment income which flows in both
directions. But the U.S. consistently earns more income on its overseas assets
than foreigners earn on U.S. assets—about $212 billion more every year.
Why? Is it because U.S. citizens and institutions are
smarter or more talented investors? No, it's in part because the USA is a good
place to invest and foreigners are attracted to our open markets, rule of law,
and low inflation (don’t laugh, it’s only low relative to other countries but
that’s good enough).
It's also due in part to the U.S. dollar's reserve currency
status. So many countries and their central banks hold such large balances of
U.S. dollars for global trade purposes, an arrangement going back to the
Bretton-Woods monetary agreement of 1944.
Therefore there is high demand to park those vast amounts of
global reserve dollars somewhere to earn interest while they are not
immediately used or needed. One popular instrument, although hardly the only
one, is U.S. Treasury Bonds which are perceived by foreigners as safe and
highly liquid.
But all those foreigners looking for places in the U.S. to
invest their dollars have fewer options than Americans looking to the rest of
the world to invest their own money.
So Americans are paid more on their overseas holdings due to
simple supply and demand: a huge demand for U.S. investments chasing a limited
supply, and therefore our assets command higher prices which equates to lower
investment returns.
A perfect example once again is Treasury bonds. Whatever one
might feel about the $21 trillion debt—and I sure don't like it myself—the
reality is Uncle Sam enjoys much lower interest payments on U.S. bonds than
other countries have to pay investors on their bonds—all because U.S. Treasury
bonds are in such high demand with so many overseas dollars to put to work.
***So the second amendment to the now $502 billion
merchandise/services trade deficit is to adjust for America’s $212 billion
investment income account surplus. The “trade deficit” is now down to $295
billion.
_______
Finally there's other benefits of the U.S. dollar as a
reserve currency. Foreign countries and their central banks must hold onto
trillions of U.S. dollars to facilitate international trade with one another
and to a lesser extent the USA.
So unlike every other currency in the world, U.S. dollars do
not automatically come back to the United States to buy U.S. exports. By
contrast, if another country like Taiwan buys imports with its currency—the New
Taiwan dollar—the trade partner country that receives those New Taiwan dollars
has no use for them other than to buy Taiwanese exports in return or invest in
some Taiwanese asset.
Either way, Taiwan has to give up real goods and services—either
for sale or for ownership—in exchange for imported goods and services. So does
every other country in the world—except for the USA.
The U.S. is uniquely privileged in that the dollar is the
primary currency used for global trade and held by foreign central banks in
large quantities.
Therefore Americans import cool stuff from overseas that
enhance our standard of living, and all the foreigners get back is dollars—a
great many of which they can never use to buy cool stuff from the USA.
Combined with cost benefits enjoyed by U.S. banks (a smaller
benefit) that don't have to worry about converting deposits into a different
currency for loans, and don't have to worry about hedging against negative
currency movements on their loans, the annual trade benefit to the USA in 2018
is estimated at approximately $250 billion (Eichengreen: $211 billion in 2011
dollars).
However, since we are using 2011-2015 average numbers,
adjusting for inflation and world GDP growth we revise the annual benefit to an
average of $226 billion.
***So the third amendment to the now $295 billion
merchandise/services trade deficit is to adjust for America’s $226 billion
global reserve currency benefit, and the “trade deficit” is now a very
manageable $69 billion.
_______
$69 billion is a mere 0.345% of U.S. GDP, and it’s also
93.4% less than the “trade deficit” that is routinely reported on the news.
Given that our trade picture with the world as a whole is
much more balanced than the news would have you believe, you now can put
yourself in the position of our trading partners other than China.
China itself still runs a large surplus with the USA—even
after adjusting for services, investment income, and reserve currency
benefits—in part because it is the world’s low-cost manufacturing workshop, and
in part because it does “cheat.”
But that means the rest of the world collectively runs a
deficit with the USA—despite protectionist measures on the part of some
countries, most of which feel they are simply compensating for the asymmetric
benefit the USA receives for holding the global reserve currency.
Even with targeted tariffs on certain U.S. imports, foreign
leaders and finance ministers must be shaking their heads when they see the
U.S. media repeat “$739 billion deficit" over and over.
Furthermore, with the recent boom in U.S. energy production
and rising oil and natural gas exports, it’s not inconceivable that the
existing $69 billion total balance of trade deficit can be tipped into surplus
in the next few years (assuming no recession comes before then).
_______
One last note about the big-picture trade deficit. There is
a missing accounting item I haven't mentioned yet which pushes the actual
balance of trade deficit from a relatively insignificant $69 billion back up to
a more worrisome $199 billion.
Officially it's called "unilateral transfers"
which is another way of saying money crossing borders in exchange for no goods
or services in return.
This includes pension, insurance, and tax payments from the
residents of one country to another country, foreign aid, or remittances.
Americans or foreign residents in the USA, U.S. based institutions, and the
federal government send $130 billion more overseas than residents living
abroad, overseas institutions, and overseas governments send to the United
States.
Two major drivers of these unilateral transfers deficit
should be pretty obvious—immigrants sending money from the USA back home, and
U.S. government military and foreign aid overseas.
To the extent that immigration is legal I think few would
quarrel with remittances, but with so many illegal immigrants in the USA
(estimates as high as 13 million) sending remittances back to their home
countries, it’s hard to deny that illegal immigration is having a noticeable
impact on America's global balance of trade deficit math.
Foreign aid dollars sent overseas and the cost of defending
other countries has also traditionally been unpopular with a majority of
Americans.
And that is the trade policy space where President Trump
should focus. True, illegal immigration has been one of President Trump's
policy priorities so it's not as if he isn't trying to stem the tide, but as
far as America’s trade deficit is concerned it's the an area he can
legitimately point to as being a major driver of trade imbalances.
And Trump has also been trying to get some form of
compensation from rich nations the U.S. is defending such as Japan, Korea, and
Germany.
The COCEA believes if he focuses more on slowing illegal
immigration and foreign/military aid, and less on tariffs that risk destructive
trade wars, the USA’s balance of trade deficit picture can be quite acceptable
and not that big a deal.