[OPE-L] Trade Deficit Disorder

From: Rakesh Bhandari (bhandari@BERKELEY.EDU)
Date: Fri Mar 17 2006 - 12:15:54 EST

oops same message as the last but under an appropriate subject line

The US leaves low return opportunities at home for foreigners while
enjoying high returns on its external operations... I have wondered
whether such such findings could be worked into an updated defense of
Lenin's understanding of imperialism.


Trade Deficit Disorder
March 16, 2006; Page A12

The economy is growing smartly, more Americans are working, wages are
rising, capital spending is robust and federal tax revenues are rising
at a double-digit year-over-year pace. This must mean it's time for
everyone to worry about the trade deficit as the latest sign that all
this prosperity is an illusion.

On Tuesday, the Commerce Department reported that the U.S.
current-account deficit (the amount of net American borrowing from
foreigners) grew by 20% to $804.8 billion in 2005. Last week's related
headliner was that the U.S. merchandise trade deficit hit $726 billion
in 2005. And all of this has caused the trade protection caucus on
Capitol Hill to start hyperventilating.

One protectionist group in Washington is claiming that three million
manufacturing jobs have been lost to low-cost imports. Warren Buffett
moans that Americans who aren't as rich as he is "have been selling off
the farm" to live beyond their means. He even lost a bundle for his
shareholders betting that the dollar was headed for a dive. Senators
Lindsey Graham of South Carolina and Chuck Schumer of New York are
proposing a 27.5% tariff against imported goods from China.

Here we go again. For at least the past 30 years protectionists have
warned that the trade deficit will lead to ruin, but it's closer to the
truth to say this has it exactly backward: Since the mid-1980s the
trade deficit has risen when the economy has grown and receded when the
economy has faltered. The lowest annual U.S. trade deficit in recent
times was recorded in 1991, a recession year. Dan Griswold of the Cato
Institute recently ran the numbers and discovered that "there is a
strong correlation between rising trade deficits and falling

Part of the problem here is simply one of accounting definition. In the
national income accounts, the mirror image of a merchandise trade
deficit is a capital-import surplus. When the U.S. investment climate
improves -- through such policies as reducing the tax rate on capital
gains -- global investment dollars flow into the U.S. Foreigners in
turn earn the dollars to pay for those investments by selling Americans
more goods and services than they buy from us.

This global exchange process has been a formula for U.S. success:
American workers get the auto, technology and financial services jobs
that come with foreign investment here; American consumers get the
benefit of low-priced products from China and elsewhere, which raises
workers' standard of living.

We would all be better served by simply throwing overboard the term
"trade deficit" -- which inaccurately connotes a disadvantage or
inferiority. To refresh some memories, that was precisely the
conclusion of the U.S. Advisory Committee on the Presentation of
Balance of Payment Statistics during a previous trade-deficit scare in

That group of eminent economists advised that "the words 'surplus' and
'deficit' should be avoided insofar as possible" because "these words
are frequently taken to mean that the developments are 'good' or 'bad'
respectively. Since that interpretation is often incorrect, the terms
may be widely misunderstood and used in lieu of analysis." (Our

Senators might also consult a new study by Ricardo Hausmann and
Federico Sturzenegger, of Harvard's Kennedy School, who argue that
these current-account deficits are in reality a statistical illusion.
They found that the net return on the U.S. financial position in 2004
was roughly a positive $30 billion and not much different than it had
been in 1982, despite 22 years of deficits.

How can that be? "A correct descriptive explanation of this puzzle is
that the rates of return of U.S. liabilities is significantly smaller
than the return on its assets," Mr. Hausmann writes. Foreigners are
willing to accept a lower rate of return on their U.S. investments,
such as Treasury bills, because they are partly buying dollar currency
stability, liquidity, and a safe haven against political and economic
risk. Foreigners, for example, hold hundreds of billions of dollars of
U.S. currency, which is the equivalent of a zero interest loan to

By contrast, American assets abroad earn higher than normal rates of
return because of noncounted factors such as insurance, know-how, and
the value of universally recognized brand names like McDonald's and
Disney. When taking these into account, the authors conclude that
America is a net creditor, not a net debtor, nation. Even more
surprising, correctly measured, China is a net debtor to the U.S.

Ironically, those who are most alarmist about a fire-sale on U.S.
assets are promoting policies that would encourage that capital flight.
Raising the U.S. capital gains tax rate back to 20% from 15%, or the
dividend rate to 35% from 15%, would reduce the after-tax return on
capital invested here and contribute to the very investment sell-off
that the critics fret about. Capital also flees nations with
protectionist trade policies, so the Graham-Schumer tariff bill would
be economically self-defeating.

There are things Congress could do to raise net national U.S. saving --
notably, spend less money. This means we wouldn't borrow so much from
abroad. But in a global capital market, the key to growth is providing
the opportunities to invest, not whether your national accounts
balance. The time to worry about the trade deficit is when Congress
tries to do something about it.


This archive was generated by hypermail 2.1.5 : Sat Mar 18 2006 - 00:00:02 EST