Why Does the U.S. Always Run a Trade Deficit?

As an example, since this is HN: the US creates a ton of startups. Any country that creates new businesses is going to see foreign investment, which on paper leads to a trade deficit. Essentially, the US exports businesses to the rest of the world, but that is not tallied in a 19th century model for the trade balance of goods. However, it's arguably a better export that commoditized goods, from a margin standpoint.

Overall these graphs change dramatically based on where the exact geographic boundaries are set and how one defines goods/services/investment. Clearly the US hasn't run out of cash and needed to massively print dollars to cover foreign debt, which would happen very quickly if the system were actually imbalanced.

No one else can manufacture USD's, so other countries have to acquire them by shaping their economies to supply goods and services demanded by the US. They can then use these earned dollars to transact with other countries, as the US itself insists they do.

For the US, this is a simple trade off - gain massive political influence (and market intelligence - all USD transactions go through US institutions regardless of where those transacting partners are located), at the expense of hollowing out domestic industry and running a deficit in physical goods traded.

The solution is a non-national global reserve, calculated on a basket of national currencies. This was Keynes argument at Bretton Woods, but the US would not have it then, and does not want it now.

But why isn’t it: deficits are due to a persistent surplus in funds from abroad to finance domestic investment, perhaps because the economy produces high returns and welcomes foreign investment?

Trading partners want to sell us goods for no more than our money. If we have nothing they want to buy, then the result will be a surplus of US currency out there. Parking it in US assets drives the cost of debt way down for the US, and the low rates disincentivize domestic savings.

The whole point of free trade is a win-win game. Someone has stuff/services you need, and you're willing to pay for them. In the end, everyone is happier than before.

I read quite often claims that state if services were included, the US would be in a trade surplus.

But in my own rudimentary research, it appears services are in fact included.

Can someone confirm.

The real wealth is not dollars or pounds or whatever, the real wealth is goods and services.

Having access to goods and service is what gives you a better living standard, the money is just a way to exchange them and to store value.

The US has the privilege of having high international demand for its currency, as it is the default global reserve currency. Of course, it incurs some costs, like having to have the most powerful military in the world, being implicitly responsible for making sure navigation waters are free and unimpeded for commerce, and having to try to keep the powder keg from where most of the energy that runs the world comes from, the middle east, from exploding.

In exchange, if you want more oil? more steel? more children toys? more paint? more chips? You can just use your dollars to buy it, and thus making sure your citizens have access to an unimaginable amount of stuff and services.

You can make the world work for you in exchange for dollars. And the world can buy your advanced tech and services with those dollars, and can use those dollars to also buy things they need from other countries without a lot of the complication of multiple exchange rates and/or barter schemes.

And the best part? Your government can run a lot of programs and not care much about raising taxes, because all those sellers after they use part of the dollars for buying stuff from you and between themselves, will usually have some extra dollars that they are going to save for a rainy day. And what is the best way to keep those dollars safe? Well, buying american treasury bonds!

Yeah, you can exaggerate a little bit and end up deindustrializing yourself too much, or go too hard on the consumption frenzy thing and end up with too much trash, environmental issues and household debt. But those are problems that come from the abuse, from the over enthusiastic use of this privilege. And I hope they can be solved (don't ask my how).

The system actually works for anyone involved. Nobody is really interested on this de-dolarization stuff as long as America also doesn't abuse its power too much.

International commerce is a complex machine, and everybody depends on it, everyone know that changing the current system too much would disrupt international commerce for years. Yeah, in the long run, everything would converge to some new equilibrium, but nobody fucking knows what that equilibrium would be, if it would be stable, and crucially, how much time it would take for it to be achieved. As Keynes taught: In the long run we will be all dead.

No country wants their dollar reserves to become dust, especially not china, they sweated a lot to accumulate all those nice treasury bonds.

Is there research on the link between the availability of cheap foreign goods and domestic saving and investment? E.g. would people invest more domestically if they could obtain returns making domestically manufactured goods? Doesn’t the availability of cheap Chinese goods arguably suppress domestic investment? E.g. Apple investing tens of billions into its Chinese supply chain.

I’d also be curious why the EU doesn’t consistently run trade deficits.

The oil example is very compelling for import substitution. And the covid example is interesting in showing the savings rate only went up as an offset of gov spending.

I'd love to see a follow up on (a) is it important for the US to increase domestic savings and (b) what are the best policies to do so, and why are they the best?

I imagine blanket tariffs might actually increase the savings rate because they increase the cost of importing all goods when the domestic alternatives are either inferior or more expensive. But I'm curious if they are the best way to achieve the savings goal.

This sounds backwards, I suspect he's being a bit sloppy when he says that. To sustain the trade deficit it was necessary to enormously increase China's productive capacity so that they could build the goods that get shipped to the US. If the US wasn't running a trade deficit the number in the statistics might have been lower, but it is quite likely that the amount of productive capital actually built in the US would have increased and they might have the same amount of real stuff at the end of the day. They could have built a similar amount of production in the US, for example, instead of importing. The accounting identity for that might be a lower number but that doesn't immediately tell us anything about what the real outcome would have looked like.

It is like the situation where nominally China's economy is nominally smaller than the US's, even though as far as the economists can tell China produces more actual stuff. Accounting identities are so basic that they abstract out a lot of important detail vis a vis what an outcome looks like on the ground. Accounting identities always hold, so any situation that can theoretically occur will have a valid accounting identity. It doesn't make sense to rank outcomes by how high investment spending is, it is important to know what real changes would occur. Which identities can't tell us because they are general.

Obviously he is technically correct that he can argue that, but it is insinuating a relationship. This stuff is the bane of central planners, it is nearly impossible to tell in the abstract whether a change in accounting identities was good or bad for productive capacity.

https://www.econtalk.org/the-economics-of-tariffs-and-trade-...

I believe that most services are also excluded, but they may have changed that.

Transfer pricing screws up the numbers as well.

How does savings become investment spending? Is that through borrowing? Who says borrowing is used for investment? Sure, it's not a great idea to borrow to spend but even corporations sometimes (do stupid things like) borrow to pay dividends which is not investment.

Is this better?

More buyers than sellers.

There is no fix for the world moving into its own derivative technologies, and simply abandoning increasingly hostile origin markets.

It is a complex situation, and throwing taxes/money at the issue is naive =3

The US has long been playing a game where they give other nations currency that it prints out of nothing on the pretext that this currency can be redeemed for something of real value, but then goes to great lengths to ensure that those foreign nations never actually redeem the currency. This is the 1971 gold crisis in a nutshell. Now the trade deficit in fiat money is just a continuation of this scheme... Backed by even less value. That's why it feels like western economies are being hollowed out. The US economy has been hollowed out and taking its allies down with it.

It's kind of ridiculous how much backlash Trump was getting for trying to do something that is both sensible and necessary. To restore the real economy.

Countries acquire such assets with dollars. They need to get dollars. The acquire dollars by selling things Americans want, typically physical goods as Americans are very good at making the non-physical kind.

Unfortunately this incentivizes the never-ending march towards de-industrialization in the USA, as countries earn dollars by making things. They get more efficient every year, and more skilled, making more things, to acquire dollars.

That is, I would argue, the single biggest issue animating politics today. It is the argument against globalization, one that has not been solved, and the turmoil in politics across the West with gyrating governments is because voters continue to desire change, and solutions, which no party has yet solved.

Arguing that voters are "stupid" is itself stupid. Voters vote the way they vote. It is on elites and politicians to solve the problem of deindustrialization while maintaining the parts of globalization that are beneficial. If you want to wring your hands and blame the voters, that's fine, but in a democracy you should try to win votes and not call people stupid.

When I sell stuff to someone in the UK, then pounds are fine as means of exchange. When I sell the same someone around the world, then the transaction not being domestic, the cash part that is 1/2 of it (or 1/4 if you want to look at it in a way of transaction = quartet of {stuff,cash,buyer,seller}) and it can be in any currency of any country. It helps if it is the country of the buyer or the seller, but in general it is neither.

I prefer US Dollar to Zongoan Vonga, b/c:

1) USG typically does not devalue their USD much, I don't have to rush to exchange the USD for something else. Or if you want - most others devalue theirs more.

2) USG has not deleted and re-issued their USD even once so far afaik. Other countries do it more often.

3) Everyone else uses USD already. It's easier if it's one currency sufficing for all trade.

4) Often I don't produce oil, and oil is easiest to pay by with USD. Not impossible with others, just more difficult.

5) US banks allow me to hold USD in accounts outside of US. They don't ban me to take the USD in- or out- of US.

6) With USD in hand I can buy lots of stuff US produces, plus I can buy US assets - property, financial assets etc. US does not discriminate against me johnny-the-foreigner much, they are mostly relaxed in that respect. Other countries have all manner of rules that amount to: they'll basically steal their currency off you, or make it worthless to you by making you unable to claim the goods & services that are nominally sold in that currency.

Before people pipe in how US is terrible in this and that - above is all *relative* to all other options all other currencies available. This is from to top of my head, I'm sure I made some error and there is more.

This isn't good for unskilled labor in rural parts of America, often in swing states. Manufacturing had always been a place for high school grads to have a decent career. Those days are over with, but politically they decide the election.

I'm surprised to not see nationalism talked about. The topic of trade deficit seems to be less about economic reasons and more about a political movement towards nationalism.

This can be seen in Europe right now, as well as India and Brazil - where those respective governments have taken actions that strongly favor local/in-country based companies over foreign.

And it appears the current US administration is taking a similar approach.

> Spending is either on the consumption of goods and services or investment spending on equipment, structures, and intellectual property products. Income is allocated to either consumption or to saving by households, businesses, and government. In a closed economy, spending equals income—that is, the sum of consumption and saving equals the sum of consumption and investment spending.

> Spending (Consumption + Investment Spending) = Income (Consumption + Saving)

> Because consumption drops out on both sides of the equation, investment spending equals domestic saving in the economy. This makes sense: the funds available to invest in productive projects have to come from domestic savers.

It _doesn't_ make sense. How is consumption on the income side of the equation? And even if that somehow did make sense, who is to say the consumption on the income side is the same as the consumption on the spending side such that they balance out?

Saving is deferred spending, meaning money is set aside temporarily. One might think of this like a "cash queue" where the velocity of money slows down for a while. Is the assumption that all saving takes place in banks where banks can lend it out? If I stuff cash in a mattress (saving), how can that cash be used for investing?

A more realistic version might look like this:

                (fast)
  Income --+--------------+-> Spending --+--> Consumption
     ^     |              |              |
     |     +--> Saving >--+              |
     |          (slow)                   |
     |                                   v
     +---------------------- Investment and Production

EDIT: If I'm asking questions, saying I don't understand, and offering a counter-model, doesn't that count as adding to the discussion? If I'm operating under some misunderstanding, there are certainly others who have the same misunderstanding but didn't speak up.

Where else is China et al going to sell all the stuff they can produce via their physical overinvestment that was driven by the “export led growth” mantra?

There is no untapped source of demand anywhere in the world. There isn’t the income. All they could do is produce less and cause their economies of scale to go into reverse.

So instead they sell stuff for accounting entries, which are then used on the asset side of their currency area balance sheet to justify issuing more of their own currency and maintain the circulation.

They could, of course, just buy the time currently used for producing excess exports and maintain the circulation in any case. But that would cause lots of people who are hard of accounting to get very upset.

So instead they continue with financial mercantilism, allowing everybody there to pretend that they are productively engaged, not metaphorically digging holes and filling them back in again.

And that would continue, thanks to those nations supplying the accounting entries and receiving all that nice output, but for somebody getting elected on the US side who actually believes the “lack of saving” line and decided to do something about it. To the loss of the US people.

Quite why he think that saying the US isn’t paying enough for Canadian lumber or Chinese cars is good for anybody is beyond me.

Another win for the Emperors New Clothes.