1. NS3040 Fall 2018 Trade Deficits: How Much Do They Matter?
CFR, The US Trade Deficit: How Much Does it Matter?

2. U.S. Balance of Payments I
President Trump has made reducing the U.S. trade deficit a priority of his administration
Argument that
Renegotiating trade deals,
Promoting “Buy American” policies and
Confronting China over what they see as economic distortions
Will
Shrink the trade deficit
Create jobs and
Strengthen National Security
Need to look at bigger picture

3. The Security Trilemma

4. U.S. Balance of Payments II
Many economists and trade experts
Feel this line of argument makes little sense based on empirical data
Do not believe trade deficits hurt the economy
Warn against trying to “win” the trade relationship with particular countries
Others however believe trade deficits a problem with a debate over
How much of the trade deficit caused by foreign governments,
What policies if any should be pursued to reduce it.

5. U.S. Balance of Payments III
What is a trade deficit?
Nation imports more than it exports.
In 2016
The U.S. exported $2.2 trillion in goods and services while
Importing $2.7 trillion
Left a trade deficit of roughly $500 billion.
Deficit in goods $750 offset by a surplus in services trade.

6. U.S. Balance of Payments IV
What causes a trade deficit?
Imbalance between a country’s savings and investment rates
For country as a whole, spending more money than it makes which results in current account deficit.
Additional spending must go toward foreign goods and services
Financing that spending can be done by
Borrowing from foreign lenders (which adds to the U.S. national debt) or
Foreign investing in U.S. assets and business, the capital account

7. U.S. Balance of Payments V
More government spending if it leads to a larger federal budget deficit reduces the national savings rate
This raises the trade deficit
A portion of the budget deficit is effectively financed through the rise in the amount Americans borrow from abroad.
The exchange rate of the dollar is important – a stronger dollar makes
Foreign products cheaper for American consumers, while
Making U.S. exports more expensive for foreign buyers
Growing U.S. economy also often leads to a larger deficit since
consumers have more income to buy more goods from abroad and
strong economy drives up the exchange rate

8. U.S. Balance of Payments VI
How has U.S. Trade Deficit Changed Over Recent Decades?
2016 $500 billion deficit about 2.7% of GDP
Down from 2006 peak of over $760 billion or 5% of GDP
Deficit has averaged $535 billion since 2000
Much higher than in previous decades when it averaged well below 2% of GDP
U.S. ran either a surplus or small deficit through the 1960s and 1970s
Large deficit opened in the 1980s and continued to expand through the 1990s and 2000s.

9. U.S. Balance of Payments VII

10. U.S. Balance of Payments VIII
By far largest bilateral trade imbalance with China
U.S. had a $347 billion deficit with China in 2016
Next largest deficit is with Japan at $68 billion
Deficit with China expanded dramatically beginning in the early 2000s from an average of $34 billion in the 1990s
Called the “China Shock”
Result of Chinese economic reforms to
Stabilize production,
Accelerate industrialization and
Increase Exports
Exports accelerated after China entry into WTO in 2001

11. U.S. Balance of Payments IX
While many attribute the loss in manufacturing jobs to Chinese exports, most economists attribute it to
Automation,
Productivity increases, and
Demand shifts from goods to services
Why are some observers concerned about the trade deficit?
President Trump
Argues “trade deficits hurt the economy very badly
Blames “horrible deals” with Mexico, South Korea and other countries

12. U.S. Balance of Payments X
Peter Navarro, senior economic adviser to Trump believes that the deficit threatens national security in to finance the deficit the U.S. depends on
Foreign debt and
Foreign investment
Some Democratic lawmakers, labor groups and manufacturers also criticize the deficit on grounds some foreign countries have used unfair practices like
Currency manipulation
Wage suppression and
Government subsidies
To increase exports while blocking U.S. imports

13. U.S. Balance of Payments XI
Some economists argue that China’s Competitiveness stems from its production and state involvement in the economy giving its exports an unfair advantage.
Other economists worry about consequences of large and persistent imbalances.
Debt necessary to finance the deficit may be heading toward unsustainable levels
Large inflows of foreign capital that accompany trade deficits can lead to financial bubbles and may have contributed to the U.S. housing crash beginning in 2006
Some argue that large deficits drain demand from the domestic economy and slow growth when economy performing under its potential

14. U.S. Balance of Payments XII
Arguments against focusing on the deficit.
Many economists argue trade deficit has been scapegoated
Trade deficit not itself a problem
Larger trade deficits can be a result of a stronger economy
Trump’s “deficits mean you lose, and surpluses mean you win” makes no sense if trade is voluntary.
Economists also highlight singular role of U.S. economy in
Providing liquidity to the global economy and
Driving demand around the world
U.S. trade deficit is thus central to global economic stability

15. U.S. Balance of Payments XIII
The dollar’s role as the reserve currency and primary tool for global transitions means
Other countries rely on holding dollar reserves
Massive demand for U.S. financial assets
The U.S. pays little for foreign borrowing
U.S can finance its high consumption at low cost
Boosts global demand.
Some argue a U.S. trade surplus could lead to lower global growth and more economic instability among U.S. trade partners
Many economists stress trade boosts overall economy by lowering prices and increasing productivity.

16. U.S. Balance of Payments XIV
Options to reduce the deficit are limited
Protectionism would probably make it larger
Bargaining for increased market access might help
Weakening the dollar might help, but other tradeoffs and not clear the best way to do this
Best way is to increase U.S. saving rate
Means government reducing its budget deficit.
However new tax plan will probably increase the budget thus increasing the balance of payments deficit