Trade deficits: Should you worry?

The answer, of course, depends upon who you are, where you are and whether you're an individual or a sovereign government. Also relevant are answers to other questions that appear to be asked infrequently, if ever, by the financial press, mainstream media or our government leaders. Questions such as, "What, if any, are the implications of the size of a trade deficits relative to a nation's GDP?" Or, "Does a trade deficit with a hostile, unfriendly or, at the very least, a far-less-than-cooperative country pose a threat to a nation's economic well being? And possibly its sovereignty?"

Of course, these questions are meaningless if one believes that trade deficits are meaningless. And if one thinks of trade statistics as just numbers generated by some obscure government bureau charged long, long ago with the task of gathering and keeping these arcane statistics that are of little relevance to today's post-modern, globalized economy, well, ask yourself this question: Why does every trading country on the planet keep these stats? Everybody's keeping track of all these numbers for some reason, right? 

If America's large trade deficit is such a great thing and so great for the long-term economic benefit of the country, why aren't all our trading partners with trade surpluses knocking themselves out to "trade" places with us?  But before we seek answers to these considerations, let's look at some trade history.

We'll get our information directly from the source, the Bureau of Economic Analysis (BEA). By the way, for those of you with MS Excel and penchant for cranking your own numbers, the stats about to be discussed may be downloaded in spreadsheet form here. Just right-click on the file named "trade_deficit_gdp.xls" then click "save target as" to the directory of your choice. Links to the original source documents are included on the relevant pages.

First, which number are we going to call the trade surplus/deficit? For the purposes of this discussion we'll use what's termed the "Balance on current account" which is line 77 of the BEA's Table 1. - U.S. International Transactions. This total includes the payment balances on goods, services, income and unilateral transfers and so represents the net funds exchanged over the course of a given year. Using this number rather than just the "goods" statistic is important from at least one standpoint - recognizing a specific the structural change that has taken place in America's trade relationships. More on this later.

Let's start with the following table. (link here)












YEAR

1960

1975

1982

1987

1991

1998

2006



Gross Domestic Product (GDP)

526.40

1,638.30

3,255.00

4,739.50

5,995.90

8,747.00

13,194.70



Balance on










  Goods

4.89

8.90

-36.49

-159.56

-76.94

-248.22

-838.27



  Services

-1.39

3.50

12.33

7.87

45.80

82.08

79.75



  Goods & Services

3.51

12.40

-24.16

-151.68

-31.14

-166.14

-758.52



  Income

3.38

12.79

35.16

14.29

24.13

4.27

36.64



  Unilateral transfers

-4.06

-7.08

-16.54

-23.27

9.90

-53.19

-89.60



  Current account

2.82

18.12

-5.54

-160.66

2.90

-215.06

-811.48













Current Account as % of GDP

0.5%

1.1%

-0.2%

-3.4%

0.0%

-2.5%

-6.2%













  Services plus Income ( S+I )

1.99

16.29

47.49

22.17

69.93

86.35

116.39



  Goods plus Transfers ( G+T )

0.83

1.83

-53.03

-182.82

-67.03

-301.41

-927.87



  Sum (=current account balance)

2.82

18.12

-5.54

-160.66

2.90

-215.06

-811.48



  Ratio ( S+I )/( G+T )

2.40

8.91

-0.90

-0.12

-1.04

-0.29

-0.13













Current Account - Accum. Total

2.82

55.65

31.99

-527.03

-823.74

-1,674.36

-5,966.33













Billions of dollars - current dollars










(no CPI adjustments)










Sources:





































We start with the year 1960 because that's when this series starts in the BEA tables. And besides, that probably goes farther back than we really need to go anyways. From 1960 to 1975 the Current Account Balance (CAB) bounces around in rather small increments while never going below a -0.5% of GDP nor above the +1.1% in 1975. No big numbers, no big deal. Notice that the Accumulated Current Account Balance (ACAB) reaches a positive $56.65 billion, this being just shy of the peak of $59.94 billion reached in 1976. Between 1975 and 1982 the CAB bounces around plus or minus of zero with a minor net reduction of the ACAB to $31.99 billion in the later year. Since then, with the sole exception of 1991, we've experienced a negative CAB. With the net result being a negative ACAB of $5.996 trillion at the end of 2006. We're on schedule for something around another $750 billion to $800 billion CAB deficit in 2007. Those numbers will be available from the BEA on March 17th. Don't hold your breath waiting for encouraging news.

From 1982 to 1987 we averaged about 2.7 % of GDP as a CAB deficit. From 1987 to 1991 around 1.3 %. 1991 to 1998 approximately 1.6 %. But, from 1998 to 2006 we averaged a 4.9 % CAB deficit, reaching a peak of 6.2 % in 2006. 2007 will be a bit better, but not by much.

So?

My contention is that statements such as those by Mr. Forbes:

"The dumbest, most destructive economic policy of the Bush Administration has been its weak-dollar position--letting the dollar slide in value against the euro, the yen, the pound and gold. The repeatedly disproved theory in operation here is that cheapening your currency will improve your trade balance and that an improved trade balance makes your economy stronger and wealthier. Put aside the meaninglessness of the trade balance as a measure of economic health or sickness--the U.S., after all, has had a trade deficit with the rest of the world for 350 years out of the last 400. A weak-currency policy has disastrous economic and political consequences--most immediately, our tumultuous equity markets." (Emphasis added)
are meaningless when he refers to the last 400 years of American trade history. Today's trade deficits are unprecedented both in absolute terms and as a percentage of GDP. And the extended duration of these deficits represent an unprecedented transfer of wealth to persons and sovereign entities outside the U.S. Whether you like it or not.

Is this bad? Well, that depends. Will foreigners and sovereign wealth funds be more prudent custodians of our financial assets? It's hard to see how they could do worse than the financial institutions that are currently being bailed out after the natives made financial fools of themselves with their sub-prime misadventures. The question here is, why are all the "foreigners" stepping in? Answer: they are the only ones with the money. Where did they get it? From us, of course!

The most important issues regarding "trade deficits" may not even be economic. Rather, they're more likely political. As the U.S. diminishes in importance on the world economic stage, a diminution accelerated by our own greed, and more and more of our economic assets are owned by sovereign wealth funds, just how independent can we remain in terms of our foreign policy? Can Israel continue to count on our support as the Saudis, no friends to the Jews, squeeze ever harder? For how much longer can the Taiwanese feel confident that we are behind them as the Chinese build a larger and more modern military with U.S. technology and dollars? How do other countries in the Middle East and East Asia view our relationships with Saudi Arabia and China? Are they confident that we stand with them? For the long haul? Can they if we're owned by sovereign wealth funds controlled by these "friends"?

Economics and foreign policy are two sides of the same coin. Whether or not you have an issue with what may ensue given the increased influence of foreign nation upon our economic destiny, please be assured that their influence and demands will become an increasingly unavoidable part of our domestic political scene.

So, how does that influence your vote?
The answer, of course, depends upon who you are, where you are and whether you're an individual or a sovereign government. Also relevant are answers to other questions that appear to be asked infrequently, if ever, by the financial press, mainstream media or our government leaders. Questions such as, "What, if any, are the implications of the size of a trade deficits relative to a nation's GDP?" Or, "Does a trade deficit with a hostile, unfriendly or, at the very least, a far-less-than-cooperative country pose a threat to a nation's economic well being? And possibly its sovereignty?"

Of course, these questions are meaningless if one believes that trade deficits are meaningless. And if one thinks of trade statistics as just numbers generated by some obscure government bureau charged long, long ago with the task of gathering and keeping these arcane statistics that are of little relevance to today's post-modern, globalized economy, well, ask yourself this question: Why does every trading country on the planet keep these stats? Everybody's keeping track of all these numbers for some reason, right? 

If America's large trade deficit is such a great thing and so great for the long-term economic benefit of the country, why aren't all our trading partners with trade surpluses knocking themselves out to "trade" places with us?  But before we seek answers to these considerations, let's look at some trade history.

We'll get our information directly from the source, the Bureau of Economic Analysis (BEA). By the way, for those of you with MS Excel and penchant for cranking your own numbers, the stats about to be discussed may be downloaded in spreadsheet form here. Just right-click on the file named "trade_deficit_gdp.xls" then click "save target as" to the directory of your choice. Links to the original source documents are included on the relevant pages.

First, which number are we going to call the trade surplus/deficit? For the purposes of this discussion we'll use what's termed the "Balance on current account" which is line 77 of the BEA's Table 1. - U.S. International Transactions. This total includes the payment balances on goods, services, income and unilateral transfers and so represents the net funds exchanged over the course of a given year. Using this number rather than just the "goods" statistic is important from at least one standpoint - recognizing a specific the structural change that has taken place in America's trade relationships. More on this later.

Let's start with the following table. (link here)












YEAR

1960

1975

1982

1987

1991

1998

2006



Gross Domestic Product (GDP)

526.40

1,638.30

3,255.00

4,739.50

5,995.90

8,747.00

13,194.70



Balance on










  Goods

4.89

8.90

-36.49

-159.56

-76.94

-248.22

-838.27



  Services

-1.39

3.50

12.33

7.87

45.80

82.08

79.75



  Goods & Services

3.51

12.40

-24.16

-151.68

-31.14

-166.14

-758.52



  Income

3.38

12.79

35.16

14.29

24.13

4.27

36.64



  Unilateral transfers

-4.06

-7.08

-16.54

-23.27

9.90

-53.19

-89.60



  Current account

2.82

18.12

-5.54

-160.66

2.90

-215.06

-811.48













Current Account as % of GDP

0.5%

1.1%

-0.2%

-3.4%

0.0%

-2.5%

-6.2%













  Services plus Income ( S+I )

1.99

16.29

47.49

22.17

69.93

86.35

116.39



  Goods plus Transfers ( G+T )

0.83

1.83

-53.03

-182.82

-67.03

-301.41

-927.87



  Sum (=current account balance)

2.82

18.12

-5.54

-160.66

2.90

-215.06

-811.48



  Ratio ( S+I )/( G+T )

2.40

8.91

-0.90

-0.12

-1.04

-0.29

-0.13













Current Account - Accum. Total

2.82

55.65

31.99

-527.03

-823.74

-1,674.36

-5,966.33













Billions of dollars - current dollars










(no CPI adjustments)










Sources:





































We start with the year 1960 because that's when this series starts in the BEA tables. And besides, that probably goes farther back than we really need to go anyways. From 1960 to 1975 the Current Account Balance (CAB) bounces around in rather small increments while never going below a -0.5% of GDP nor above the +1.1% in 1975. No big numbers, no big deal. Notice that the Accumulated Current Account Balance (ACAB) reaches a positive $56.65 billion, this being just shy of the peak of $59.94 billion reached in 1976. Between 1975 and 1982 the CAB bounces around plus or minus of zero with a minor net reduction of the ACAB to $31.99 billion in the later year. Since then, with the sole exception of 1991, we've experienced a negative CAB. With the net result being a negative ACAB of $5.996 trillion at the end of 2006. We're on schedule for something around another $750 billion to $800 billion CAB deficit in 2007. Those numbers will be available from the BEA on March 17th. Don't hold your breath waiting for encouraging news.

From 1982 to 1987 we averaged about 2.7 % of GDP as a CAB deficit. From 1987 to 1991 around 1.3 %. 1991 to 1998 approximately 1.6 %. But, from 1998 to 2006 we averaged a 4.9 % CAB deficit, reaching a peak of 6.2 % in 2006. 2007 will be a bit better, but not by much.

So?

My contention is that statements such as those by Mr. Forbes:

"The dumbest, most destructive economic policy of the Bush Administration has been its weak-dollar position--letting the dollar slide in value against the euro, the yen, the pound and gold. The repeatedly disproved theory in operation here is that cheapening your currency will improve your trade balance and that an improved trade balance makes your economy stronger and wealthier. Put aside the meaninglessness of the trade balance as a measure of economic health or sickness--the U.S., after all, has had a trade deficit with the rest of the world for 350 years out of the last 400. A weak-currency policy has disastrous economic and political consequences--most immediately, our tumultuous equity markets." (Emphasis added)
are meaningless when he refers to the last 400 years of American trade history. Today's trade deficits are unprecedented both in absolute terms and as a percentage of GDP. And the extended duration of these deficits represent an unprecedented transfer of wealth to persons and sovereign entities outside the U.S. Whether you like it or not.

Is this bad? Well, that depends. Will foreigners and sovereign wealth funds be more prudent custodians of our financial assets? It's hard to see how they could do worse than the financial institutions that are currently being bailed out after the natives made financial fools of themselves with their sub-prime misadventures. The question here is, why are all the "foreigners" stepping in? Answer: they are the only ones with the money. Where did they get it? From us, of course!

The most important issues regarding "trade deficits" may not even be economic. Rather, they're more likely political. As the U.S. diminishes in importance on the world economic stage, a diminution accelerated by our own greed, and more and more of our economic assets are owned by sovereign wealth funds, just how independent can we remain in terms of our foreign policy? Can Israel continue to count on our support as the Saudis, no friends to the Jews, squeeze ever harder? For how much longer can the Taiwanese feel confident that we are behind them as the Chinese build a larger and more modern military with U.S. technology and dollars? How do other countries in the Middle East and East Asia view our relationships with Saudi Arabia and China? Are they confident that we stand with them? For the long haul? Can they if we're owned by sovereign wealth funds controlled by these "friends"?

Economics and foreign policy are two sides of the same coin. Whether or not you have an issue with what may ensue given the increased influence of foreign nation upon our economic destiny, please be assured that their influence and demands will become an increasingly unavoidable part of our domestic political scene.

So, how does that influence your vote?