THE TRUTH ABOUT THE U.S. TRADE IMBALANCE

In 2017, the U.S. exported $ 1,551 billion worth of goods while importing $ 2,362 billion worth for a merchandise trade deficit of $ 811 billion. But this is not a loss to the United States in any meaningful way: First,the lives of a hundred million American households are made better every day by imports of automobiles, electronics, clothing, shoes, fresh produce, and pharmaceuticals. Meanwhile, U.S. producers keep their factories humming with imported machinery, crude oil, lumber, steel and other inputs. Second, Americans trade not only in goods, but also in services and in investment assets. The U.S. is typically running up large surpluses in services trade, in income generated by foreign investment, and in the sale of assets, otherwise known as foreign investment. Combined with a smaller deficit in unilateral transfers and an even smaller statistical adjustment for “errors and omissions,” the U.S.  grand balance for its broad trade with the rest of the world is  ZERO.

In other words, that $800 billion that is supposedly lost through the merchandise deficit is immediately regained through the surpluses in the other accounts. Dollars flow out on net to buy goods, but an equal and offsetting amount of dollars flow back to buy American services and assets, and as returns on U.S. assets owned abroad.

U.S. International Trade Balance (Annual US Balances, approximate) Source: US. Department of Commerce

1. Trade in Goods: -$ 800 billion (outflow/deficit)
2. Trade in Services: + $ 240 billion (inflow/surplus
3. Investment Income:+$ 220 billion (inflow/surplus)
4. Unilateral transfers: - $ 100 billion (outflow/deficit)
5. Investment capital: + $ 400 billion (Inflow/surplus)
6. Errors and Omissions: + $ 40 billion (inflow/surplus)

Grand Trade Balance: $ 0 billion

Definitions

• Investment income payments,refers to money received by U.S. financial investors on their foreign investments (money flowing into the United States) and payments to foreign investors who had invested their funds here (money flowing out of the United States). The reason for including this money on foreign investment in the overall measure of trade, along with goods and services, is that, from an economic perspective, income is just as much an economic transaction as shipments of cars or wheat or oil: it is just trade that is happening in the financial capital market
• Unilateral transfers are payments made by government, private charities, or individuals in which money is sent abroad without any direct good or service being received. Economic or military assistance from the U.S. government to other countries fits into this category, as does spending abroad by charities to address poverty or social inequalities. When an individual in the United States sends money overseas, it is also counted in this category. The current account balance treats these unilateral payments like imports, because they also involve a stream of payments leaving the country.
• The capital ac­count shows transactions relating to the inter­national movement of ownership of financial assets. It refers to cross-border movements in foreign assets like shares, property or direct acquisitions of companies’ bank loans, gov­ernments securities, etc. In other words, capi­tal account records export and import of capi­tal from and to foreign countries. The capital account is divided into two main subdivisions one is the short term and another is the long term movements of capi­tal. A short term capital is one which matures in one year or less, such as bank accounts. A long term capital is one whose maturity period is longer than a year, such as long term bonds or physical capital. Long term capital account is, again of two categories: direct investment and portfolio investment. Direct investment refers to ex­penditure on fixed capital formation, while portfolio investment refers to the acquisition of financial assets like bonds, shares, etc. On the other hand, portfolio investment refers to changes in the holding of shares and bonds. Such investment is portfolio capital and the ownership of paper assets like shares does not ensure legal control over the firms.

Foreigners who sell to the U.S. want something valuable in return. They quickly use the dollars they earn selling in the U.S. to buy the goods, services, and assets available in the United States, or they sell the dollars in global foreign exchange markets to people who do want to spend them in the United States. For that reason, the amount of dollars Americans spend to buy goods, services and assets abroad each year exactly equals the amount of dollars foreigners spend to acquire goods, services, and assets in the United States.

Trade restrictions will likely cause unintended damage to the well-being of Americans by disrupting all the mutually beneficial ways the U.S. does business in the global economy. Fewer dollars flowing out to buy imported goods will mean fewer dollars available to flow back to buy U.S. exported services or to buy U.S. stocks or Treasury bills, or to expand a foreign-owned manufacturing plant.

America’s trade with the world is always balanced, broadly and properly understood. The question is whether that trade will be free and mutually beneficial, or whether the U.S. government will restrict Americans’ freedom to buy and sell in global markets in a self-destructive effort to reclaim dollars that were never lost in the first place.