Why trade def icits matter

Trade deficits don’t matter, explained Forbes this week. “Donald Trump is suffering from trade deficit disorder,” chimed in the Financial Times. In Foreign Policy it was, “Economists to Trump: It’s Not the Trade Deficit, Stupid.” These and literally thousands of other articles speak to an overwhelming consensus from economists who believe only economic ignoramuses could think otherwise.

These economists are right, but only when viewing the economies of the world from 30,000 feet. In the real world, on terra firma, the economists are the ones suffering from a disorder.

Trade deficits do matter, profoundly, and on numerous grounds.

The consensus economists, such as American Enterprise Institute’s Mark Perry, editor of the respected Carpe Diem economics blog, like to cite the bedrock principle that “countries don’t engage in trade with each other — only businesses and consumers do.”

Really? America’s biggest trade deficit is with China, which accounts for almost half of America’s trade deficit.

Those Chinese firms aren’t following a free-market playbook — they are instruments of China’s communist government, either directly owned or indirectly controlled by the communist regime. So much for the premise that countries don’t engage in trade.

More fundamentally, the consensus economists argue that trade deficits have equal financial offsets — the dollars the Chinese sellers get in exchange for their goods soon get invested in treasuries, real estate or other assets. As Perry put it last year, “for Trump and the media to constantly lament America’s trade deficit is to lament the fact that foreigners are eagerly investing hundreds of billions of dollars in America every year. We shouldn’t think of trade deficits as losing to countries such as China, but rather as ‘inflows of foreign investment capital that strengthen America’s economy.’”

Foreign investment capital, when disciplined by market forces, is desirable. When undisciplined, not so much. In 2005, soon-to-beFederal Reserve Chairman Ben Bernanke argued that the U.S. trade deficit was doing the rest of the world a favour by putting the excess savings accumulated by China and others — he called it a “global savings glut” — to work financing U.S. fiscal deficits and, especially, a surge in new U.S. home construction. That “favour” soon led to the real estate bubble and the Great Recession of 2007.

Trade deficits mattered then, and they would have even without the Great Recession. A large trade imbalance can lead to chronically low interest rates as foreign savings of U.S. dollars flood into the U.S. Or it can lead to the purchase — or attempted purchase — of domestic industries. China’s buying spree of assets it considers strategic — such as those in Canada’s resource sector — was ultimately rebuffed by our federal government, partly due to unease at giving a communist government outsized influence over the energy sector. The U.S. today similarly fears China’s ability to control the commanding heights of the U.S. economy — a conquest-by-purchase scenario, according to Trump economic guru, Peter Navarro, director of the new White House National Trade Council. “Suppose it is not a benign ally buying up our companies, our technology, our farmland and our food supply chain, and ultimately controlling much of our defense industrial base,” he warned this week. “Rather it is a rapidly militarizing strategic rival, intent on hegemony in Asia and perhaps world hegemony.”

Enormous trade imbalances, like the U.S. has been accumulating, point to a sickness in the country’s economy. The U.S. government spends too much and, largely as a result, individuals save too little. As Yale economist Stephen Roach notes, America’s net domestic savings rate of about three per cent is less than half of the 6.3-per-cent average of the last three decades of the 20th century.

In linking America’s immense governmental deficits and trade deficits, Roach argues that the only meaningful solution to U.S. trade deficits is “boosting national saving. That would wean the U.S. off excess reliance on foreign capital and the multilateral trade deficits required to secure the inflows from abroad. But it would require a long-profligate America actually to live within its means. Without a restoration of saving via federal budget reductions or expanded private saving incentives, trade deficits are here to stay.”

In these and other ways, America’s trade deficits are central to understanding its many economic dysfunctions. One can reasonably argue whether trade deficits at different times are helpful or hurtful to an economy, whether they are a cause of economic malaise or merely a symptom of it. One cannot reasonably argue that trade deficits don’t matter.