Monday , January 27 2020
Home / Political Thoughts - the magazine / Why Trade Deficits Must be Avoided

Why Trade Deficits Must be Avoided

Summary:
I have just finished reading yet another article on how Trade Deficits are harmless or even good for a country (The Trade Deficit Matters, But Not How You Think by Jeffrey Dorfman). Trade deficits happen when a country imports more than it exports, the excess imports need to be purchased using loans. The general thesis is that economists in the UK and USA have had the brilliant insight that buying imports on credit makes us all richer now and that there is nothing wrong in this.  German, Japanese and other economists who maintain that getting ever deeper in debt is simply wrong are thought to be stupid.It is true that Trade Deficits do not affect GDP today but they do affect it tomorrow. A Trade Deficit of 4% of GDP now is a loss of 4% of GDP over succeeding years as the debt and interest

Topics:
John considers the following as important:

This could be interesting, too:

J. writes Multinational Corporations versus Democracy

J. writes Independence at Last – Hooray!

J. writes Diverting the Population from Environmental Issues

J. writes Reconciling Remain and Leave

I have just finished reading yet another article on how Trade Deficits are harmless or even good for a country (The Trade Deficit Matters, But Not How You Think by Jeffrey Dorfman). Trade deficits happen when a country imports more than it exports, the excess imports need to be purchased using loans.

The general thesis is that economists in the UK and USA have had the brilliant insight that buying imports on credit makes us all richer now and that there is nothing wrong in this.  German, Japanese and other economists who maintain that getting ever deeper in debt is simply wrong are thought to be stupid.

It is true that Trade Deficits do not affect GDP today but they do affect it tomorrow. A Trade Deficit of 4% of GDP now is a loss of 4% of GDP over succeeding years as the debt and interest is repaid.  Can it really be argued that a slightly deferred loss of GDP is not a loss of GDP?

Why Trade Deficits Must be Avoided

World economic history is full of examples of countries where persistent trade deficits have caused economic disaster.  In recent years Greece is a good example.  Yet in the USA and UK economists are queuing up to support the idea that trade deficits do not matter.  My favourite quote from the UK/USA economics stable is this about the USA:

"According to our static analysis, the main welfare cost of eliminating the current account deficit is simply the loss of the free lunch, i.e. the loss of goods that we currently consume but do not pay for until later. That cost is on the order of six percent of GDP." UNBALANCED TRADE Robert Dekle et al

The paper should have been called "Let the kids pay" although, given the size of the UK and USA deficits over the past 10 years, we are those kids.. Make no mistake, the use of credit to finance consumption now, with no thought to creating a sustainable, productive domestic economy for ourselves and our children will deprive these children of their inheritance.  Our "free lunch" is stolen from our own, and our children's, future.

When trade deficits are huge like those of the USA and UK, and cause debt to pile up, the interest payments become very significant and start to become a major burden on the National Accounts even before the debts themselves have to be repaid. In the UK this debt burden has led to continuing Austerity (as it has in other EU countries with large trade deficits).

Why Trade Deficits Must be Avoided

Economists who favour Trade Deficits are particularly malignant because they seldom, if ever, consider Sectoral Balances.  All of a country's money is either in the hands of the public sector, the private sector or overseas (allowing for inflation).  In any given year the money in these three places must balance because it adds up as a relatively constant total money possessed by a country.

Why Trade Deficits Must be Avoided
Graphic by Hereticus Economicus
This means that a net flow of money out of the country as a Current Account Deficit has to be balanced by public and private debt. The Current Account Deficit is often called the "Balance of Payments Deficit" and in the UK over half of it is caused by the Trade Deficit with much of the rest caused by remittances of interest/dividend payments/profits of foreign owned UK companies and rental income overseas.

A popular myth about Trade Deficits is that money spent on imports is always recycled back into the domestic economy. Pounds or Dollars spent overseas must always find their way home. There is little doubt that this is approximately true but the loans given for that part of imports that create the trade deficit release goods, not money and are not even always in pounds and dollars. To simplify: if a German sells you a 30,000 Euro car and you pay using a loan agreement so that you owe the German 30,000 Euros, none of these Euros will rapidly cycle back into the UK economy.  Had you not required a loan and bought the car with £25,000 cash then that money would rapidly percolate back to the UK.  So it is approximately true to say that money spent on imports finds its way back home, the caveat being that the money spent on imports that create a trade deficit does not necessarily find its way back or does so very slowly.

Those who support Trade Deficits usually attempt to cloud the issue by saying International Trade and Imports are good and "mercantilism" is bad.  They ask inane questions like "do you want to stop trade?". This is deliberate obfuscation because none of these points have much if anything to do with a Trade DEFICIT, which is getting into debt to pay for overseas purchases rather than earning the money from exports to pay for them.  No-one is saying "stop imports!", what is being pointed out is that imports and exports should balance.

The UK has a far worse problem with Trade Deficits than the USA because it is a member of the Single Market. The UK Trade Deficit is the current cause of Austerity and the UK Trade Deficit is largely a result of Single Market membership.  The UK must seize the opportunity presented by leaving the EU to correct the Trade and Current Account Deficits.

Why Trade Deficits Must be Avoided
So economics journalists in the UK and USA have spread the myth that Trade Deficits do not matter and do not affect GDP.  The only groups that really benefit from this disinformation are international banks like Goldman Sachs that provide loans to support trade deficits, multinational companies, which depend on international trade, and China. Perhaps economics journalists in the US and UK are showing off in front of these potential patrons.

If you are still feeling confused and inclined to support anti-Brexit "experts" just contemplate what would happen after years of £40 bn trade deficit a year financed by loans, it is obvious that the economy would eventually have to break.  Ask the Greeks. The way the government stops the loans building up is Austerity but that makes the poor pay for the Trade Deficit. If you still think that  economists cannot be supporting something that is obviously wrong, ask yourself why we have a productive economy at all when we can supposedly just live on imports bought on credit? Just a moments reflection shows that Trade Deficits are obviously a bad idea.

The persistent US and UK trade deficits are so large (c. 2-4% of GDP per annum) and persistent that they constitute an attack on the poorer sectors of these countries by the governing and elite classes.  The Government and Corporate loan repayments created by the Trade Deficit mean that welfare and quality of  employment are restricted and Austerity becomes normal.  The Corporate Elite are happy with this state of affairs.  In the UK the elite look to employment in the EU for security and in the US they move to States that are unaffected, in both countries the elite move to employment sectors that are not affected by the continual erosion of job quality and wages.

The employment sectors that are most immune from the trade deficit are those in multinational corporations and international banks and the elite who benefit from these, especially those in the multinational corporate media, scream loudly for the continuance of the status quo.  As time goes on, and the multinationals become ever more dominant, the clamour from the Corporate Elite is mutating into a demand for governance that favours the multinational businesses that they serve.

Footnote: Aggregate Benefit of Trade Deficits.

There is a school of thought in economics that one country's trade deficit is another country's trade surplus thus at the global level we should ignore trade deficits and focus entirely on trade volume. The theory is that, provided trade is growing, trade deficits may be of "aggregate benefit" to the world.  Those who adhere to the aggregate benefit justification of Trade Deficits should be aware that the world is a very large place and nowadays widely practices variants of Chinese Capitalism: Capitalism without democratic oversight or accountability.  Freedom is a more important aspiration than material wealth and by financing tyranny with the gift of trade surpluses we are risking our freedom.  The Chinese have accumulated enough wealth from their surpluses with the West to create a global empire. Of course, multinational corporations don't care about this - so long as they have a capitalist market freedom is of no consequence.

Aggregate benefit thinking is actually out of date.  Mark Carney, in his Roscoe Lecture: The Spectre of Monetarism summarises the idea of aggregate benefit and its downside:

"Globally, since 1960, real per capita GDP has risen more than two and a half times, average incomes have begun to converge, and life expectancy has increased by nearly two decades. Despite such immense progress, many
citizens in advanced economies are facing heightened uncertainty, lamenting a loss of control and losing trust in the system. To them, measures of aggregate progress bear little relation to their own experience. Rather than a new golden era, globalisation is associated with low wages, insecure employment, stateless corporations and striking inequalities"

Aggregate benefit supporters maintained that a small loss from wealthy countries was worthwhile because it lifted the prosperity of the whole globe. It may have had this effect but now, with the rise of China into a developed economy and with India close on its heels, much of the non-Western economy no longer needs the sacrifice of the US and UK poor for their prosperity and responsible US/UK governments should now seek to stop the adverse effects of Trade Deficits on their own people.

UK and US government economists who still practice "aggregate benefit" thinking to justify trade deficits must be brought to account.  A policy of inflicting debt on the US and UK so that other countries such as China can have a surplus is an important policy decision that cannot be left in the hands of ideologically motivated civil servants.

25/07/2018

About J.
John

Biography data hidden due GDPR Data Protection. Author consent pending.
(Economic Blogs is not responsible for linked external content)

Leave a Reply

Your email address will not be published. Required fields are marked *