Tarek Alexander Hassant: Trade deficit is actually sign of American strength

By TAREK ALEXANDER HASSAN
Of Boston University

When President Donald Trump imposed sweeping new tariffs on imported goods on April 2 – upending global trade and sending markets into a tailspin – he presented the move as a response to a crisis.

In an executive order released the same day, the White House said the move was necessary to address “the national emergency posed by the large and persistent trade deficit.”

A trade deficit — occurring when a country imports more than it exports — is often viewed as a problem. And yes, the U.S. trade deficit is both large and persistent.

But as an economist who has taught international finance at Boston University, Harvard University and the University of Chicago, I maintain that this persistent deficit is actually a sign of America’s financial and technological dominance. It certifies the U.S. as an investment magnet

A trade deficit sounds bad, but in fact, it is neither good nor bad.

It doesn’t mean the U.S. is losing money. It simply means foreigners are sending the U.S. more goods than the U.S. is sending them.

America is getting more cheap goods. In return, it is giving foreigners financial assets: dollars issued by the Federal Reserve, bonds from the U.S. government and American corporations, and stocks in newly created firms.

A trade deficit can only arise if foreigners invest more in the U.S. than Americans invest abroad. In other words, a country can only have a trade deficit if it also has an equally sized investment surplus.

The U.S. is able to sustain a large trade deficit because so many foreigners are eager to invest here.

Why? One major reason is the safety of the U.S. dollar.

Around the world, from large corporations to ordinary households, the dollar is used for saving, trading and settling debts. As the world economy grows, so does foreigners’ demand for dollars and dollar-denominated assets, from cash to treasury bills and corporate bonds.

Because the dollar is so attractive, the Federal Reserve gets to mint extra cash for use abroad, and the U.S. government and American employers and families can borrow money at lower interest rates.

Foreigners eagerly buy these U.S. financial assets, which enables Americans to consume and invest more than they ordinarily could. In return for our financial assets, we buy more German machines, Scotch whiskey, Chinese smartphones, Mexican steel and so on.

Blaming foreigners for the trade deficit is like blaming the bank for charging a low interest rate. We have a trade deficit because foreigners willingly charge us low interest rates – and we choose to spend that credit.

US entrepreneurship attracts global capital. The trade deficit is simply a byproduct.

Another reason for foreigners’ steady demand for U.S. assets is American technological dominance:

When aspiring entrepreneurs from around the world start new companies, they often decide to do so in Silicon Valley. Foreigners want to buy stocks and bonds in these new companies, again adding to the U.S. investment surplus.

This strong demand for U.S. assets also explains why Trump’s last trade war in 2018 did little to close the trade deficit.

By themselves, tariffs do nothing to reduce foreigners’ demand for U.S. stocks, bonds and dollars.

If the investment surplus doesn’t change, the trade deficit cannot change. The U.S. dollar just appreciates, so imports get cheaper, undoing the effect of the tariff on the size of the trade deficit.

This is basic economics: You can’t have an investment surplus and trade surplus at the same time, which is why it’s silly to call for both.

It’s worth noting that no other country in the world enjoys a similarly sized investment surplus. If a normal country with a normal currency tries to print more money or issues more debt, its currency depreciates until its investment account — and its trade balance — goes back to something close to zero.

America’s financial and technological dominance allows it to escape this dynamic.

That doesn’t mean all tariffs are bad or all trade is automatically good. It does mean the U.S. trade deficit, poorly named though it is, does not signify failure. It is the consequence – and the privilege – of America’s outsized global influence.

The president’s frenzied attacks on the nation’s trade deficit show he’s misreading a sign of economic strength as one of economic weakness. If the president really wants to eliminate the trade deficit, his best option is to rein in the federal budget deficit, which would naturally reduce capital inflows by raising domestic savings.

Rather than reviving U.S. manufacturing, Trump’s extreme tariffs and erratic foreign policy are likely to instead scare off foreign investors altogether and undercut the dollar’s global role. That would indeed shrink the trade deficit — but only by eroding the very pillars of the country’s economic dominance, and at a steep cost to American firms and families.

From The Conversation, an online repository of lay versions of academic research findings found at theconversation.com/us. Used with permission.