Sustainable trade deficit is important macroeconomic goal, but over the years some started to express their doubts about it. After all United States strongest economy in the world has been dragging enormous trade deficit for decades without much inconvenience ( except for terrible looking numbers in the balance sheet ). I guess this led american bloggers like coyote to start making mistaken assumption about the subject:” A trade deficit is not a debt nor is it bad” claims the author. In his view sloppy media people are causing panic about non-existent problem. Well I strongly disagree with this point. Thus, allow me present my post on why trade deficit is a debt and why it is mostly bad .
First of all, what is the purpose behind balance of trade statistics. It is used to measure international capital flows. If a country like US is sending more cash abroad than it is receiving Uncle Sam is running a trade deficit. Money sent abroad fall into the hands of investors. Foreign investment together with national savings supply resources to government and private firms. In the case of united states when a national savings are low (source 1) previously mentioned demanders receive most of their funds from abroad, in other words they are borrowing on net from abroad. If this practice continuous for a number of years nation simply starts running a debt..
The example of US, a strong economy targeted by foreign investment and running a soring trade deficit is unprecedented. How long this situation might continue? There is no way to tell.. Although borrowing practises have changed since the 1980s, when investment from abroad was used to fund budget deficit,towards the more sensible direction (for the sake of increasing domestic productivity) one question remains. What if trade deficit decreased? What if americans relied more on their own resources and invested abroad gaining even more profit, influence? These two questions illustrate my problem with high trade deficit. US economy is in a good shape so far, but what if there is a possibility of making it even better by reducing the debt (i.e trade deficit) . I Guess we would all agree that it would be foolish not to support such idea.
Debates about trade deficit are surrounded by confusion. Usually dependence on investment from abroad leaves country vulnerable to external pressures. What if foreigners decide to leave like they did in Russia or South America in the 1990s? But United States is far stronger economy, thus it is hard to judge how growing trade deficit will affect it in the future. Despite that two facts remain clear: negative balance of trade is a debt and a debt can not benefit the economy. Thus, it is important to support the idea of reducing it instead of writing it off as mistaken message by „slopy media people“
PS: yes I realise that post on coyoteblog was posted ten years ago, but I still notice people( not nessecerily bloggers) preaching similar idea that trade deficit does not matter, thus this post is mostly answer to all those individuals and not some attack on other blog.