Wednesday, February 15, 2006

The Blessed US Trade Deficit

The Us is lambasted by the currency markets for its twin US deficits - imports are more than exports and Congress spends more than it collects. But that assumes the trade deficit is bad, when it's actually good.

This "twin deficit" argument has always been shaky - the US government spending deficit as a percent of GNP is a bit over 3%, same as the Europeans (which is not something to crow about, but not a reason to mark down the dollar). And if the US stopped importing more than it exported, the economies of China, Japan nd Europe would head south. Now there's an even better argument for disregarding the trade deficit:

America's trade deficit -- in December reaching a near-record $64.7 billion -- is unfortunate, right?

Wrong. Contrary to popular opinion, this so-called "deficit" is a blessing.

Consider that if Americans export lumber, sheetrock, and architectural blueprints to China so that people build a factory there, we're gleeful. "Wonderful!" we proclaim. "Exports are up and our trade deficit is down!" But if those very same building materials are assembled by Americans into a factory situated and operated in, say, Utah and then bought by Chinese investors, we complain -- led today by the likes of Senators Charles Schumer and Lindsey Graham -- that "Something's wrong! Our trade deficit is higher!"

Truth is, though, that nothing economically important separates the first scenario from the second. In each case the world's stock of productive capital grows as Americans produce things for sale to foreigners. Those cases appear different from each other only because of the conventions of international commercial accounting, which records investments separately from imports and exports.

This accounting convention creates the false impression that an excess of imports over exports -- called a "trade deficit" -- is an ominous imbalance requiring corrective action. In fact, America's trade deficit is evidence, not of any imbalance, but of the happy fact that our economy is so strong and stable that foreigners invest here eagerly.

When foreigners sell things to Americans they earn dollars. If foreigners then spend all of those dollars on American exports, trade is "balanced." There's no trade deficit or surplus. But if foreigners instead invest some of those dollars in dollar-denominated assets -- say, by purchasing that factory in Utah, houses in Hawaii, or shares of Google -- they obviously must buy fewer American exports.

So the trade deficit grows as investment in the U.S. rises.

That makes foreigners buying US assets no different to foreigners buying US products. Of course if foreigners buy a US company, they control it, but so what? The US is by far the world's best machine for converting foreigners to nationals.

Unless it's a military asset - and it won't be because the Pentagon stops that, just as it stops non-allies buying US defense products - all it means is that new management appears from overseas. If they're good, they grow the US economy, if they're not, they head home and may sell the company.

This is not to give a pass to financing the budget deficit - caused by the greed and incompetence of pols - by selling T Bills to foreigners. Although the US is no more guilty of this than France, Germany and now the UK, it should set an example and bust the pork.