US Trade Deficit Marketing

Anyone who follows business and news constantly hears about the fast growing US trade deficit with the world. We are led to believe that this is a consequence of a highly developed post-industrial economy. Given the growth of China and its labor cost advantages, it is only natural that goods would be produced there and shipped to the US. Consumers benefit through lower prices and generally increase their skills to a more service-oriented economy.

While this makes some logical sense, the data does not support this point of view. Go to the last page of the Economist (July 7, 2007) and look at some of the tables:

Country Current Account GDP Budget Balance
($ bil) (%) (% GDP)
United States -803 -6.0 -1.4

Japan +187 +3.4 -4.4
Germany +168 +4.9 +0.3
Britain - 93 -3.2 -2.8

Those are large developed economies. Now some fast-growing ones...

China +250 +8.1 -1.3
India - 10 -1.8 -3.3
Russia + 87 +5.7 +2.4

Oh yes, and here's the big winner...

Saudi Arabia + 95 +21.4 +16.6

The US has gone for a creditor nation to a debtor nation. Imports exceed exports. There's a significant budget deficit because the deficit does not include future Social Security and Medicare liabilities. Meanwhile developed economies like Germany and Japan have fund inflows greater than it's deficit. Look at the numbers. They are fully developed nations that are net exporters. Unlike the US, they have retained their manufacturing prowess. The US is a great economy - still the greatest and most innovative in the world, yet it is ceding its advantage due to it's twin deficits. For now, trading partners are balancing US accounts by purchasing Treasury bills. However, the US cannot rely on this forever. When countries lose interest, the US will need to keep it's interest rates artificially high to attract foreign investment. That will hurt US businesses and consumers.

The above data shows that great economies do not need to run deficits of any type. It also shows that fast growing developing economies do not necessarily need to run large surpluses. However, those with large surpluses like China and Saudi Arabia can exert pressure on the countries they have their money in.

So don't buy into the marketing. The US can do much better.