Let’s have some fun! Here is the back of a book cover:
Here’s another one:
As you probably noticed, there are striking similarities. Both share a rather … academic color palette. Both warn rising trade deficits are economically calamitous and must be stopped. Both sound like they could be written today. Or at any point in the last 30 years. (As it happens, the first appeared in 1989, the second in 2000.) They also share shelf space at the World Trade Organization’s library in Geneva, in the Balance of Payments section, where I found them on a recent vacation.[i] And as I laughed at how unkind history has been to them, I realized their incorrectness serves a noble purpose: Together, they unwittingly debunk the trade-deficit-doom nonsense spouted by presidential candidates whose names I have long since tired of typing. And so I grinned and took snapshots.
Worries that the trade deficit is hollowing out America’s economy, imperiling the dollar, causing debt to spiral and diminishing America’s international standing are as old as the hills.[ii] These aren’t the only two books describing them, and they surely won’t be the last. But here is the thing: If all these warnings of imminent doom were correct, wouldn’t we have seen it already? Wouldn’t there be, you know, evidence supporting the hypotheses? Wouldn’t these old books have come true?
After all, the trade deficit didn’t shrink from that “unsustainable” level after 1999. It nearly tripled over the next seven years and remains elevated today, topping $539 billion in 2015, making it far more “unsustainable” now, per the prevailing wisdom (Exhibit 1). Foreign debt has piled up, too (Exhibit 2). If the fears were true, we should be suffering through a Greek-like nightmare, toiling under foreign overlords as our economy crumbles and creditors dictate policy.
Exhibit 1: US Trade Gap Since 1960
Source: US Census Bureau, as of 6/2/2016. Annual trade balance in goods and services, 1960 – 2015.
Exhibit 2: Foreign Ownership of US Debt Since 2000
Source: FactSet, as of 6/2/2016.
But we aren’t. Despite two recessions and two of history’s worst bear markets[iii], the US economy is bigger than ever, and stocks are flirting with all-time highs they set last year. America has more jobs than ever before. Long-term interest rates are at generational lows. America isn’t marginalized in international affairs or capital markets. There are no bread lines. The dollar hasn’t collapsed. Chinese overlords aren’t writing Congress’s budget. Nor is the IMF.
I suppose you could argue we’re still just storing up trouble and the day of reckoning is coming. But at some point, for a hypothesis to be valid, there must be at least some evidence supporting it. So far we have none. The right question now isn’t, when will the straw finally break the camel’s back? Rather, it’s this: Why hasn’t an astronomical trade deficit broken us?
There are several reasons, but they all amount to this: Economies aren’t fixed pies. Yes, we buy more from other countries than we sell to them, but we are also busy creating vast wealth and new opportunities, particularly in information and services. We have a trade deficit not because we’re weak, but because we have a surplus of capital to spend elsewhere. That isn’t a sign of weakness—it’s an awfully brilliant position to be in.
But also, there are other crucial reasons why doom hasn’t arrived. For one, Uncle Sam does not fund the trade deficit, period. That debt buildup that paralleled the trade deficit’s rise? A function of two wars, and rising public spending at home. None was issued “for purpose of funding a customs bill from China.” China bought some of that debt, true, but only because they had a bunch of dollars that they wanted to invest here, and they opted for the stability of the Treasury market. (China also just sold a slew of it last year and our interest rates fell.) They also could have invested in real estate, infrastructure or companies, but they wanted to stay liquid. Countries are like that.[iv]
Actually, for the most part, the government isn’t involved in import transactions. It isn’t like Congress is logging on to Alibaba and buying various sundries for Wal-Mart to distribute. Most international transactions occur between two private parties. When I import every new Manic Street Preachers record from the UK, I don’t first ring up Jack Lew and ask him to front me the money. I already have money, because Fisher Investments pays me to write stuff. So I fire up the Internets, pull up my favorite British online music shop, and place an order. Then my bank does some things with their bank, my dollars turn into pounds, the shop gets those pounds, and I get music. Whichever bank converted my dollars to pounds now has those dollars, and they want those dollars to grow, so they invest them. In America. Those invested dollars help fuel more growth, people do well, I buy more records, and the world is a happy place. That’s obviously a micro-example, but it isn’t so different when Apple places a bulk order with a Chinese supplier, or when Wal-Mart stocks its shelves, or when Toyota sells parts to US auto shops. At no point do any of these companies call the US Treasury and say “hey we just imported some stuff, can you float a bond please, thanks, bye.” If that were the case, the US wouldn’t have run a federal surplus alongside successive historically high trade deficits in 1998, 1999 and 2000.
At the most basic level, why do we import stuff? Because other countries make products we want, for prices we want to pay! We could debate the societal implications till we’re blue in the face, but the fact remains a hooded sweatshirt manufactured here costs about $60, twice the price of a made-in-Vietnam version with equally fine craftsmanship and near-identical fabric.[v] Some people will pay the premium. But many prefer the bargain. We’re all free to choose. Imports aren’t always cheaper—my made-in-America canning jars are about one-fourth as much as the Italian equivalent—but that’s the beauty of specialization. We make what we’re great at, and we trade for what other nations are great at. America is great at services and information, so we buy a lot of gadgets and goods from other countries.
Consider the counterfactual: an economically nationalist US that imported no coffee. Don’t get me wrong, Kona coffee is great! But if that’s all we had, we would have an astounding coffee shortage, and prices would soar sky-high. So we import beans from Colombia, Jamaica, Brazil, Tanzania, Papua New Guinea, Rwanda, Indonesia and many more. As a result, we have a multi-billion dollar coffee trade deficit. But that enables all of us crazy coffee drinkers to spend money on other things, including goods and services produced here. Oh, and it helps us build multi-billion dollar coffee chains that employ many Americans here and even open stores abroad. Isn’t that better than sending all our money to Kona coffee oligarchs?
Extrapolate coffee across the entire economy, and it’s easier to see imports not as a giant sucking sound, but as a way to satisfy robust domestic demand more efficiently. When I buy cheap imported clothing, I have extra money to make jam with jars from Indiana, blackberries from Watsonville and wine from Sonoma. It’s no coincidence that the trade deficit fell in 2001 and 2009, during the last two recessions. Demand went off a cliff. As it recovered, imports rose. A big trade deficit is a natural byproduct of a growing, healthy, service-based economy.
So don’t fear it—cheer it. When we run a big trade deficit, we aren’t storing up trouble, risking a debt crisis or hollowing out our economy. We’re finding bargains and putting resources to good use so we can grow and thrive.
[i] Yes, I realize you are now probably thinking, “Wow. You visited the de-facto museum of trade deficit fears while on vacation in Switzerland? Nerd alert!”
[ii] Ok, so not that old. More like, old as Airplane II.
[iii] Bear markets that weren’t caused by trade deficits, as the bursting Tech Bubble and imposition of mark-to-market accounting rules on illiquid assets—and the government’s haphazard response—had nothing to do with how much America exported and imported in 2000 and 2008.
[iv] I presume they talked it over with their advisers and decided Treasurys matched their goals and time horizon.
[v] I know there are many, many sociological issues at play here, including working conditions and child labor in Asia. If factories there were held to US-style standards, their output would be more expensive, that’s a given. Ideally every garment on earth would be produced in a safe, clean factory by people who shouldn’t still be in school, and I dream of the day when that’s the case.