Don't Try to "Fix" the U.S. Trade Deficit

The U.S. trade deficit has ballooned from about $100 billion ($400 per person) annually in the mid-1990s to $617 billion ($2,000 per person) in 2004, reaching an all-time monthly high of $61 billion in February 2005. Many people comment that the ever-expanding U.S. trade deficit is a danger sign of the "hollowing out" of the U.S. economy, with manufacturing and service sector jobs being outsourced to China and India. Driving the process are complacent American consumers on their usual spending spree, refinancing their home mortgages (ultimately financed by Chinese investing in U.S. bonds, we are told) to pull out cash to shop at Wal-Mart (which buys at rock-bottom prices from manufacturers in China). Even Warren Buffett goes on record in his Berkshire Hathaway annual report, stating how foreign-made products flowing into the hands of U.S. consumers are balanced by a similar amount of U.S. assets flowing out into the control of foreigners. As Buffett sees it, without a government policy change, the longer-term implication would be the transition of America into a "sharecropper's society," with Americans effectively paying rent (to foreigners) in order to live on land that was once their own--a far from happy situation for ownership-oriented Americans, which "would undoubtedly produce significant political unrest."

Expressed this way, the trade deficit seems problematical. However, I question the above viewpoint, opting instead to take a more global, "border-free" perspective. Let me explain by starting with a domestic analogy:

Consider the relationship between California, with its fertile central valley, and Washington state, with its colder climate. I'll simplify the discussion by assuming that Washingtonians, with their riches obtained from owning Microsoft stock over the past two decades, buy all of their fruits and vegetables from Californians, who are able to grow produce at a much lower cost. To feed its troops of software engineers and their families, Washington state runs a large interstate trade deficit with California, exacerbated by the preference California residents have for open-source Linux products (i.e., little interest in buying the software that Washingtonians write). Californians use their profits from thriving farm produce sales to buy, among other assets, Microsoft stock and Washington real estate. As the years go by, certain Washingtonians begin to voice concern over the interstate trade deficit, saying that dividend and rent payments are now disproportionately escaping into the hands of out-of-staters, turning Washington into a "sharecropper's state," which undoubtedly will lead to political unrest . . . . All right, with some hyperbole, I think you get the picture.

My point is that, just as no problem should or would develop between Wahington and California based on interstate trade issues, the U.S.'s international trade imbalance likewise should not be viewed as a rampant disease that needs to be cured. The existence (or non-existence) of a problem with the trade deficit really is a matter of where we draw the line between "us" and "them." At a "micro," transactional level, the American consumer who buys the goods and the manufacturer in China who runs the factory that makes them are equally happy with the business deal that is run through middlemen like Wal-Mart. Also, American consumers are pleased with the low interest rates they achieve when refinancing their homes, and the Chinese are quite content buying U.S. mortgage-backed securities. Only at the "macro" level, when we start to distinguish between "Americans" as one group and "foreigners" as another does the accounting begin to look problematical.

With American consumer behavior and the U.S. trade deficit being deep-rooted structural issues in the U.S. and world economy, I believe that appealing to the government in an attempt to "fix" what really may not be a problem at all is unnecessary and even quite risky (as the saying goes: If it ain't broken, don't fix it!). In my opinion, what concerned Americans should do is adopt a "healthier" global view, by considering both "us" Americans and "them" foreigners as all part of the same "family." Under this viewpoint, the exchange of products for assets between "younger" and "older" member nations of the same global economy would be accepted as quite normal, similar to how a retired executive sells a few shares of stock to cover his discretionary spending since the paychecks are no longer rolling in.

Of greater concern than the trade deficit itself should be the rules of the economic game. If opportunities always exist for younger people, younger generations and younger nations to grow economically by offering products (and services) to their more established "brethren" nations, what generally will result is a very natural exchange of products for assets, i.e., a trade deficit. With individuals, this basic cycle runs its course over a lifetime, whereas with nations, as history shows, the transition from "young" to "old" can take centuries. Given all of the interdependencies and linkages between nations in today's global economy, it is also possible that (again quite naturally without government intervention) trade deficits might come and go, as exchange rates, GDP growth rates, local wages and other factors all adjust to drive the complex dynamics of the global economy. (Note that the U.S. ran a trade surplus in the 1960s.)

To sum up: Trade deficits are, by and large, normal occurrences in the development of nations and evolution of the world economy. Also, the presence or absence of a trade deficit is somewhat artificial, since it depends on where we draw our national borders, i.e., how we do the accounting. Instead of prodding elected government officials to implement policy changes to balance international trade, we should spend our time encouraging our government to enforce rules to give all nations equal economic opportunity. By focussing on growing the whole economic pie rather than dwelling on the parochial "us" vs. "them" dichotomy, we will all, as global family members, be better off in the end.