The Trade Deficit Isn’t a Scorecard, and Cutting It Won’t Make America Great Again
Imagine a world where there are only two countries, and only two products. One country makes cars; the other grows bananas.
People in CarNation want bananas, so they buy $1 million worth from people in BananaLand. Residents of BananaLand want cars, so they buy $2 million of them from CarNation.
That difference is the trade deficit: BananaLand has a $1 million trade deficit; CarNation has a $1 million trade surplus.
.. But this does not mean that BananaLand is “losing” to CarNation. Cars are really useful, and BananaLandites got a lot of them in exchange for their money.
.. If you want to think of it in terms of winners and losers, in fact, you could justifiably reverse Mr. Trump’s preferred framing: “Those losers in Mexico gave us $58 billion more stuff than we gave them last year. Ha, ha, ha. We’re winners.”
.. Unfortunately, how countries use these capital inflows is not always so good. In the United States, the influx of foreign capital in the mid-2000s went in large part to fuel an unsustainable housing and mortgage bubble. Greece’s capital inflows in the same time period went to fund bloated public spending.
.. When a Malaysian company does business with a German company, in many cases it will do business in dollars; when wealthy people in Dubai or Singapore’s government investment fund want to sock away money, they do so in large part in dollar assets.
That creates upward pressure on the dollar for reasons unrelated to trade flows between the United States and its partners. That, in turn, makes the dollar stronger, and American exporters less competitive, than they would be in a world where nobody used the dollar for anything except commerce involving the United States.
.. In the mid-20th century, the economist Robert Triffin warned that the provider of the global reserve currency would need to run perpetual trade deficits to keep the world financial system from freezing, with those trade deficits potentially fueling domestic booms and busts.