Wednesday, November 22, 2017

At Least We Can Be Thankful for the 11 "Fair" Traders

November 22, 2017

At Least We Can Be Thankful for the 11 “Fair” Traders

Most of the rest of the world is so unfair to us (U.S.) when it comes to trade. If it were not for this unfairness, perhaps the U.S would rank higher than ninth in the world in per capita GDP adjusted for purchasing power parity (PPP), according to the World Bank.

To see who the “good” and “bad” guys are in terms of U.S. trading partners, I looked through the list of the 41 countries enumerated in my Haver Analytics database that are U.S. trading partners. (This is not a complete list of individual country trading partners, just the list provided in the database I have. For a more complete list, I would have to pay up for the “premium” database.) With these 41 countries, the U.S. ran a trade deficit in goods of $746 billion in 12 months ended September 2017. The U.S. ran a goods trade surplus with only 11 of the 41 countries. That aggregate goods trade surplus was $113 billion. That means that the aggregate U.S. goods trade deficit with the other 30 countries was $859 billion. So unfair!

The 11 countries we ran a surplus with were Hong Kong (less a country than a wholly-owned subsidiary, $31.9 billion), Netherlands ($24.3 billion), Belgium ($14.9 billion), Australia ($13.7 billion), Singapore ($11.0 billion), Brazil ($6.4 billion), Argentina ($4.2 billion), Chile ($2.5 billion), Egypt ($2.3 billion), UK ($1.6 billion) and Norway (less than $0.1 billion). Goods deficits with four countries accounted for almost 66% of the $859 billion aggregate deficit with the 30 countries with which we ran trade deficits in goods – China ($363.2 billion), Mexico ($69.6 billion), Japan ($69.5 billion) and Germany ($63.0 billion). As an aside, while the put-upon U.S. ranks ninth in terms of PPP per capita GDP, as mentioned above, those trade cheaters Germany, Japan, Mexico and China rank 16th, 22nd, 61st and 70th, respectively. I guess cheaters never really win in the end.

Given our aggregate $746 billion goods trade deficit with these 41 countries, I found it curious that only 11 countries were “fair” traders with us – “fair” as it has come to mean in some circles as countries running a goods trade deficit with us. Could 73% of our trading partners really be cheaters? Then I remembered an “alternative” fact. Namely, if aggregate spending on goods and services in an economy (or household) is greater than the value of goods and services produced in that economy (or household), then, by definition, that economy (or household) must be incurring a trade deficit, in effect, must be borrowing goods and services from the rest of the world.

Are these 30 countries with which we are running goods trade deficits making us run trade deficits with them via unfair trade policies? Not bloody likely! The U.S. persistently runs aggregate trade deficits because its economic sectors – households, businesses and governments – collectively spend more on goods and services than they produce. One possible reason for this is illustrated in the chart below. The green bars in the chart represent the nominal value of goods and services produced in the U.S. economy, nominal GDP, minus the sum of nominal consumer and business spending. The green bars are uniformly in positive territory, indicating that U.S. private sector nominal spending on goods and services has been consistently less than the nominal value of goods and services produced in the U.S. So, why have we run trade deficits during this period? Because of the blue line in the chart – the nominal value of government spending on goods and services. Government sector spending has consistently been higher than the surplus of GDP vs. private sector spending. All else the same, if government sector spending on goods and services were nil, then the U.S. would have been running trade surpluses during this period rather than trade deficits. Alternatively, given the amount of government sector spending,  if the structure of U.S. interest rates had been higher  and/or the U.S. tax structure had been different so as to encourage more private sector saving (i.e., discourage private sector spending on goods and services), the U.S. might have run trade surpluses rather than deficits.
Trade deficits are not inherently an economic “bad”. It depends on how an economy incurring trade deficits allocates its spending. If trade deficit is run so as to increase spending on physical capital goods and human capital while still allowing for a satisfying amount of consumer spending, then a trade deficit can be beneficial. With the investment in physical and human capital, the economy can grow faster in the future, providing enough extra income to service external debt while not having to curtail future domestic spending. But if the borrowed resources emanating from trade deficits are used to increase household and government consumption at the expense of physical/human capital spending, then the economy’s potential growth will not be enhanced. Therefore, external debt servicing will require a curtailment in domestic spending.

Regardless, as we gorge on Thursday and splurge on Friday, let’s give thanks to the aforementioned “fair”-trading 11.

Paul L. Kasriel
Founder, Econtrarian LLC
Senior Economic and Investment Advisor

“For most of human history, it made good adaptive sense to be fearful and emphasize the negative; any mistake could be fatal”, Joost Swarte
∆ + 10 = A Good Life

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