What’s causing the current trade imbalance?
In June, the United States growing trade deficit hit a new height; $75 billion. The airwaves have long been filled with politicians, pollsters and pundits occupying the nightly news, posturing with jargon-filled, esoteric diatribes on the pitfalls of the growing imbalance.
“Trade deficits hurt the economy very badly”, President Trump tweeted in April 2017, blaming it for the lack of growth in the US economy. In the intervening four years, it has only got bigger.
But what exactly is a trade deficit, and what is causing it?
Put simply, a trade deficit is when a country imports more than it exports. This can be measured across a range of sectors or industries, with specific countries, or against the world as a whole.
The theory goes that, a trade deficit, as Trump proselytized, is bad for the economy. When American consumers buy Chinese washing machines, they aren’t buying American ones. That’s bad for jobs and bad for the economy.
The US has struggled with a trade deficit for decades. The last time the country commanded a surplus was when Gerald Ford was in office, and GOP members have since fought on tickets promising a return to the heady days of commercial balance.
And while this isn’t anything new, it has recently taken on new meaning.
For much of the last 18 months, everyone has, at one time or another, been prevented from going out and leading ordinary lives. Lockdowns and curfews have been imposed from state-to-state, closing restaurants, malls, clubs and bars. Flights have been grounded, reservations cancelled, and stadiums and concert left empty.
We simply couldn’t spend our money.
As we start to emerge from our apartments once more, the insatiable appetite of the American consumer has returned. People are buying more and more stuff. Amazon has posted quarterly earnings of over $1 billion three times in a row this year.
That may sound great on the surface. But take a closer look, and the picture might not be so rosy.
If America wants to keep buying goods and services from the world, it needs to sell its own goods and services to pay for them. And to buy and sell, you need shipping containers.
Ordinarily, shipping companies charge more to import into the US than to export, because those goods coming in, like iPhones from China, are typically more valuable than those going in the other direction, like soybeans from North Dakota.
The huge increase in demand for consumer goods in the US has led to a sharp increase in the price of imports, widening the gap into what NPR’s Sally Hership calls a “shipping Grand Canyon”.
Shipping companies can charge more than seven times more for imports compared with exports, meaning it is far more profitable for them to bring high-value products into the US, quickly unload them, before racing back to Asia with empty container ships, rather than spend more time taking on another load.
America’s currently exporting more air than anything else.
The issue has been compounded by the fact that, throughout the pandemic, ships, trucks and railyards have been hit with massive delays owing to COVID-related closures, which they are still catching up on. And at the end of the line, farmers are left with foodstuffs they cannot ship.
Economists say that, eventually, as the virus subsides and recedes into the past, US consumer habits will rebalance spending away from goods and back towards services. People will start going on holiday again. Restaurants will have full tables, and families will go back to the game. The problem is that, with back-to-school sales now on and Christmas right around the corner, nobody knows when that will be.
Is it all bad?
That depends on who you ask. The polarity of trade imbalance is often dissected by the right-left continuum, certainly reflecting the mood of today’s Congress.
Conservative economist, Milton Freidman, would beg to differ. Friedman used to say that, within the discipline of economics, the ratio was 10:1 in favor of free trade. Indeed, a favorable balance was not a surplus, he argued, but in fact a deficit.
A surplus, Freidman said, “means we’re sending out more goods and getting fewer in. Each of you in your private household would know better than that. You don’t regard it as a favorable balance when you have to send out more goods to get less coming in”.
There’s another reason why running a trade deficit could be a good thing this Christmas. The government doesn’t just run a trade deficit, it also runs a budget deficit which, similarly, means it is spending more than it is taking in. In 2018 economists projected the budget deficit could exceed $1 trillion. COVID-19 has seen that figure rise to more than $2.2 trillion.
To cover this, the government sells Treasury Bills. And one of the largest owners of US government debt? China. When the US has a trade surplus with China, American consumers are paying for their Chinese products with American dollars. China then lends those dollars back to the US, in exchange for Treasury Bills, which in-turn keeps a hold of the budget deficit, allowing taxes to stay low, and bigger paychecks to buy more Chinese stuff with.
Sometimes, a trade imbalance can be remarkably balanced.
Photo: Getty Images