Economics - Trade deficit

Follow-up to my February 1 post. Although I have not combined the trade deficit with the budget deficit into some total number, I have stated that I believed they are both indicators of economic structural weaknesses that this nation will be forced to face. Back on November 6, I started writing about excessive spending as part of my post-election focuses and said:

Perhaps it is unfair to lump the national debt and trade deficits together as "borrowing", but the trade deficit does one thing that leaves me just a little paranoid... especially at 1/2 trillion dollars per year... and that is the issue of control. Somewhere in the equation of getting goods for cash is the part that says Cash = Control. Cash becomes the power to influence, the power to compete, and the power to control.

Don Beaudroux at Cafe Hayek (named after Friedrich Hayek) wrote:

In his book Exporting America, Lou Dobbs writes

Our trade deficits and budget deficits are soaring, together amounting to a trillion dollars a year [p. 30].

The ‘trade deficit’ is a deficit in the current-account. When America has a trade deficit, nothing more ominous is happening than the fact that Americans are importing more goods and services (in value terms) than Americans are exporting. Foreigners earning dollars by selling goods and services to Americans are investing some of their dollars in dollar-denominated assets – mostly stocks, bonds, real-estate, and cash.

So why does Dobbs think that this sum is meaningful? Answer: he mistakenly equates the current-account deficit with debt. It’s not debt.

All well and good... the definition is clarified. The question is not in the definition, but the significance of the trade deficit. Of that, there is much dispute... as Yoda might say.

The Cato Institute agreed with Dr. Boudreaux... or at least did in 1998. By 2004, others were not so sure, as reported in the New York Times.

Not only are many U.S. economists concerned about the trade deficit, there are a growing number of voices elsewhere in the world expressing concern. For example, John Quiggin, a Federation Fellow in Economics and Political Science at the University of Queensland, wrote in The Economists' Voice

Currently the United States imports about half as much again as it exports. Without radical changes in the U.S. economy, or specific policy initiatives on energy, a large deficit on oil imports can be taken as a given. There are important classes of consumer goods for which domestic production has ceased. If balance is to be reached in a decade, there has to be a major turnaround in the pattern of trade in some other sector. But what? At the moment, there is no sector in which the United States is currently running a significant surplus (there is a small surplus on services, but even here, the trend is flat or negative). Even with the recent depreciation of the U.S. dollar, and widely-noted productivity growth, there are no signs that U.S. producers are gaining market share in any part of the traded goods sector.

Any significant reduction in the imbalance on goods and services therefore appears likely to require very large changes in market prices or U.S. income levels, such as:
• A (further) larger devaluation of the U.S. dollar.
• Large reductions in U.S. wages relative to those overseas.
• Large increases in U.S. productivity relative to foreign productivity (the relevant concept here is multi-factor productivity, taking account of both capital and labor inputs).
• Large reductions in U.S. consumption relative to foreign consumption.

Unfortunately, no one of these alone would be enough to get the trade deficit in balance or surplus without a crisis.

...
It is inevitable that the U.S. trade account will return to balance, and likely that most of this adjustment will take place within the next ten years. The only question for policy is whether the adjustment will be relatively smooth, like the process which resolved the first U.S. trade deficit blowout in the 1980s, or sharp and costly, as in the case of the many countries that experienced financial crises in the 1990s.

What, me worry?