The United States has run negative international trade deficits since 1991. While most politicians have the same litany of simplistic solutions that involve blaming other countries for this mess, the real cause is much closer to home.
Virtually all economists agree a country’s Capital Account and Current Account must always be equal. Before your eyes glaze over, the Capital Account is really a country’s net savings and the Current Account is the difference between a country’s exports and imports, or its trade balance.
The Commerce Department has maintained the Bureau of Economic Analysis (BEA) since 1929. Anyone can access the wealth of data stored there at http://www.bea.gov. After getting to the site, click on “Interactive Data” in the top menu bar. Next click on “GDP & Personal Income. On the next page, select “Begin Using the Data”.
Under Section 5, Select Table 5.1, Saving and Investment by Sector. Scroll down to Line 35 Line 35, “Net lending or net borrowing (-), NIPA’s”, the February 28, 2018 update shows the 2017 third quarter total of -$428.4 billion, which is an annualized number based on the most recent quarter. This is the Capital Account or the US’s net savings.
Go back one screen, select Section 4 and then Table 4.1, Foreign Transactions in the National Income and Product Accounts. Scroll down to Line 33, “Balance on current account, NIPAs”, the third quarter 2017 value is also -$428.4 billion. This is the Current Account or the difference between exports and imports. These two numbers are always equal.
Figure 1
What causes the differences between exports and imports?
Since a country’s net savings equals the difference between that country’s exports and imports (and vice versa), we can start understanding the causes of our trade deficits. Back to Table 5.1, Line 10, Net Government Saving is -$806.1 billion, with Federal savings making up -$631.3 billion of that total. (Staying consistent, we’re using 3rd Quarter 2017 data in all cases.)
One might ask how the US can possibly expect to have a positive net savings if the federal government’s contribution is a minus $631 billion? Taking this to the next step, one might ask, “What would happen to our trade balance if we could end our federal government’s spending deficit?” Our net national savings would go positive, assuming other factors stayed relatively constant. And, since the Current Account must equal the Capital Account, our trade deficit disappears.
Applying tariffs and renegotiating trade deals are a complete waste of time. If we want to cut our huge trade deficit and equally huge foreign borrowing, elect truly conservative politicians that will end our government spending deficits. (Note: I specify “true conservative politicians”, not fake conservative Republicans who talk the talk and then vote for budget busting tax cuts and out of control spending increases causing ever larger government spending deficits.)
Currency manipulation
Currency manipulations are a favorite whipping boy for US politicians. Currencies do fluctuate on international markets, but don’t mistake these fluctuations for manipulations. We have a -$428.4 billion national savings deficit we cover with foreign borrowing. Somehow, we need to import $428.4 billion more goods and services than we export to make the Capital and Current accounts balance.
To do this, international currency markets adjust what are called the Terms of Trade so we wind up with a trade balance equal to our net savings. Our dollar’s value on international markets increases making US products more expensive in other countries and their products cheaper here.
The best way to get a positive trade balance is having a conservative government that balances its budget, or runs surpluses, combined with a population with a propensity for saving. Some call this currency manipulation; others call it good old-fashioned conservatism.
Trade agreements impact the volume of international trade, not the direction. China is a favorite trade deficit scapegoat. We can put tariffs on Chinese goods or simply cut off all trade with China. We would simply have bigger trade deficits with Indonesia, the Philippines and similar countries. Without changing our net national savings, our Current Account won’t budge.
Not so fast…
Although the present driver of our international accounts is our national savings, this isn’t always the case. During President Bill Clinton’s term, we had positive federal budget balances, yet consistent trade deficits. During those boom years, consumer spending and borrowing were high. Without international trade, that would have been the recipe for high inflation. Instead, importing goods was a pressure valve release for our economy and kept inflation low.
On the other side of the equation (Capital Account), we didn’t have new Treasury bills for foreigners to buy. But, because of our strong economy, the US was a great place for foreigners to invest in real assets (buildings, golf courses, farms). The same rules applied then that apply now. Our national savings must equal our trade balance. In the 1990’s, our spending on consumer goods caused our trade deficit. The Capital Account had to balance and it did.
The important point is that during the Clinton years, trade deficits were market driven. Today, our trade deficits are caused by government actions (huge budget deficits).
Fixing the problem
Moderate trade deficits when a country is at full employment are not a bad thing. Borrowing $8.8 trillion from foreigners between 2001 and 2016 is a problem. Equally huge trade imbalances negatively impact employment and wages.
Tax cuts and out of control government spending increases financed by borrowing offer a temporary false prosperity. Unfortunately, in 2008 we learned the price for this extravagance. The only real solution to our foreign borrowing and trade deficits is a conservative government that balances income and expenses.
