For the past 20 years, the United States has had large trade deficits with other countries while at the same time, the living standards for its middle class has gone up. Many free market economists say that this is good because foreigners are investing in America.

What those free market economists forgot is that the trade deficit was financed by the actions of the Fed and the central banks in Asia. Wage differences alone cannot explain the deficit. In a completely free market, the people who accumulate paper money are going to want some use for the money.

What is the cause of the trade deficit in my opinion? For the past 30 years, the government has expanded and borrowed trillions of dollars to finance its operations and pay it force of several million bureaucrats. The foreign banks were duped into "investing" in this scam. This created a "consumer class" who could then go to the Walmarts and Targets and essentially dictate lower prices without questioning the real value of the dollar.

On the American side, the people harmed were factory workers. In China and Japan, the central banks essentially subsidized the factories at the expense of other consumers. There's no need to explain the conditions for the average consumer in those countries.

What is the solution to this imbalance? Since the US Government will not cut its own red tape, the foreign creditors should pull the plug and let the dollar crash. The American "middle class" wanted to live like kings and queens. They didn't care about the merchants losing their businesses to Walmart. They didn't care about the factory workers. If the American people want their plasma TVs and computers, they can pay their factory workers an American wage and be willing to give up some of their treasures.


What is the cause of the trade deficit

Is the trade deficit good for America and why or why not?

Should the Government do anything about it?

1-The cause of the deficit is spending more than the government is receiving in income from the American peoples' taxes.
2-A deficit is never a desired, and it is always better and preferred to not have a deficit. Over the long term, foreign countries owning American debts can never be a positive.
3-The government should cut down on excess spending. There is plenty of it.

I view the the American trade deficit as a company that writes tons of bonds. Although the company is good, it is obviously preferred to invest/own a company with little or no debt. The reason for this is simple: The more debt a company/country has the more liabilities the company/country has over the longer term.

A deficit is simply a financial burden and should not be needed to help the middle class. This is obvious.

What is the cause of the trade deficit?

At one level, this is a simple question. We simple import a lot more than we export. At another level it is exceedingly complex. Unquestionably it began in the Reagan years with huge budget deficits financed with foreign borrowing. We went from the world's largest creditor nation to the world's largest debtor during those years and continued accumulating a larger and larger international debt to the point where we now owe the rest of the world some $4 trillion dollars more than they owe us. To some degree it matters how these dollars are invested. If they represent investments in the American economy, as most of them did in the Clinton years, they are somewhat less of a concern. If they are primarily the purchase of U.S. government notes by foreign (mostly China and Japan) central banks as they have been in this administration, they should be a huge concern. The contribution of imported oil is also significant in adding to the trade deficit particularly with the price more than tripling in the last few years.

Is the trade deficit good for America and why or why not?

No, yearly $666 billion dollar deficits are simply not sustainable. At some point foreign lenders will cease to loan additional funds and will start withdrawing their assets causing U.S. interest rates to soar and the housing market to crash. In the near term they do sustain what recovery there is by providing low interest funds for housing starts. Another aspect of the overevaluated dollar which promotes these huge deficits is the contribution it has made to the hollowing out of the U.S. manufacturing base.

Should the Government do anything about it?

Yes, but it is very complex and difficult to carry out politically. Americans are simply consuming more than they are producing and over time adjustments have to be made. Some economists have concluded that the dollar would need to dollar by at least 50% relative to other currencies to bring about an equilibrium. At the same time American consumption is providing the demand that is fueling the world economy so a process needs to be found that addresses boosting demand in the rest of the world while reducing it in the U.S. We could start by adopting policies to protect the remainder of our manufacturing base. We also need to continue to pressure China to continue the reevaluation of their currency until they close their trade gap with the rest of the world. Ultimately, an international conference needs to be held to focus on this issue that is fundamental to the long range health of the world economy. Then, on the other hand, Peak Oil may arrive creating economic chaos, preventing any international agreements, and causing us to default on our international debts!

nivekelly, I believe you are confusing the trade deficit with the federal budget deficit.

Why? What difference does it make who holds the notes? They aren't tied to any physical assets. There isn't any way they can be taken out of the country. They can't be called in prematurely. They're essentially just pieces of paper...the location of that paper, as well as the owner of it, seems like it would be irrelevant.

Is the trade deficit good for America and why or why not?



Again, why? How is the US trade deficit any different than, say, one between states, or cities? In today's global economy, I'm not sure it isn't essentially meaningless. Note that we've had very large trade deficits now for a few decades. I don't see the sky falling...in fact, the deficits are growing, and apparently with no ill effects. One must remember why the trade deficit exists...primarily because foreign companies, with low wages, can make many goods cheaper than they can be made in the US. So, if there is a $666 billion trade deficit....isn't the US consumer receiving $666 billion dollars of benefit? Why is that a bad thing? As long as the economy is growing, I don't think trade deficits have any ill effects. They signify the growing purchasing power of the US consumer.

Should the Government do anything about it?



Again....why? This really strikes me as a non-problem, or at least a self-correcting one. If this were labeled not as a trade deficit, but a consumer benefit (which it is)...would we be saying that it required fixing? We have a trade deficit for only one reason...because we have the capability of buying these foreign goods. If indeed this causes economic problems, those problems will take away that ability, and the deficit will go away on its own. If it doesn't cause any economic problems, then there isn't anything to worry about. In either case, the government doesn't need to do a thing.

The one scenario I have seen discussed that presents a problem is that much of trade deficit gets funneled back into the US as foreign purchase of government securities. This has essentially allowed interest rates to remain low. If this foreign purchase were to diminish, interest rates would rise, having a negative impact on the economy. But, where does the money come from to purchase these securities....from the trade deficit! So, reducing the trade deficit will dry up the funds that have been funding the government debt, causing interest rates to rise...and thereby slowing down the economy. Trade deficits are essential if the US continues to run a federal deficit. Why bite the hand that feeds you?

I did indeed confuse/misread the question I was referring to the budget deficit not the trade deficit.

Essentially, the money to purchase the securities comes from...money itself. What have the foreigners received in exchange for their products? Money.

What better way to make the government smaller than to cut off it's credit card? Cutting off the funding for government debt will force Americans to quit shuffling papers in their office buildings and actually do something useful like making an actual product! How many bureaucrats and lawyers does America need?

Now when the American people see the connection between the Gargantuan Government spending and the skyrocketing interest rates, they will demand a smaller government and that will bring interest rates back to a healthy rate. At that point, people will be wise enough to make real investments as opposed to building more strip malls and McMansions.

This is not so dissimilar to what Reagan-era Republicans said: reduce taxes and government will shrink. Clearly, that myth has been falsified by empirical evidence. I think if you want government to shrink, you need to guarantee reduced spending. Whether the money comes from taxes or credit appears to be immaterial.

What is the cause of the trade deficit?

To put it simply, foreign-made goods are cheaper than domestic-made goods. Because of this, many domestic manufacturers of similar goods have gone out of business. The US is simply being out-competed. I have no reason to believe this trend won't continue.

Is the trade deficit good for America and why or why not?

From a nationalist perspective, no; from a global perspective, it doesn't matter. The US has, until relatively recently, been a powerhouse of industrialization. It was the largest manufacturer of durable goods in the world, post-WWII. Now, it is the largest importer of durable goods in the world. Wealth is spreading globally and the US is the biggest contributer to this outflux of wealth. Interestingly enough, wealth is coming back into the US through foreign investment. Should this dry up though, we may see a shift in the economics of US-world relations.

Should the Government do anything about it?

I don't know, actually. The government has shown a propensity towards making poor economic decisions as far as I'm concerned. I see no reason for this to change. Government always looks at the short term whereas these trends are long term. On the other hand, I don't see corporations looking out for national interests. But, perhaps, this isn't a bad thing™. Hence, the "I don't know".

What do you think might happen if the creditors cut off the lending? Bush has already cut the taxes. What I'm talking about is cutting off the sources of funding for the government, both the access to foreign credit and access to taxpayers' pocketbooks. Moreover, how do you think the American taxpayers will react?

I believe what your saying is essentially correct. The federal deficit will show up either in the form of rising interest rates as the government “crowds out” other businesses in competition for loans, or in the form of a trade deficit.

Though I do enjoy writing up a doomsday scenario or two, I think your optimism is best shaken by a realistic portrayel of our current, uncontainable obligation to foreign debt collectors. Currently, asain banks are loaning the US countless billions. Think of the foreign value of an American dollar as its price on the foreign market (duh). Realize that the price of a dollar indicates how much foreign investors want that dollar. If investors want it more, the price goes up, less, it goes down.

The horror isn't that these banks are going to keep borrowing money, its that they are going to stop! Once that dark day comes, the US will have to figure out a way to pay these foreign investors back which will most likely involve reaching so deep into our own banks that interests rates will explode to new heights (Causing a recession. A big recession).

In summation, continuing to borrow from foreign countries puts us in the likely situation of having to actually pay them in ways other than borrowing from foreign countries. The reason why being a country is a big deal in this instance is that when a country decides to stop lending to you, its hard to find enough lenders to pick up the slack (of an entire country afterall). The act of paying them back through our own banks will lead to a serious recession).


I think you forget that these asain banks have a serious investment interest in the United States. Since your pretty canny on this subject, I just want to remind you that if those banks ever did stop buying US bonds, the price of their assests (billions and billions) on the foreign market would fall.

If they ever tried to cash in their billions of dollars in assests (even though they cant atm due to time constraints), their assests would likewise crash.

Basically, these foreign investors cant afford to pull the plug because doing so would substantially harm their own wealth.

What is the cause of the trade deficit?

The Dollar is a reserve currency. This is issue is MUCH more complicated that the US budget deficit.

Is the trade deficit good for America and why or why not?

There is nothing inherently dangerous about a trade surplus or trade deficit. Japan started their trade surplus around 1990 and their economy has been stagnant during that time. A large surplus or deficit could be a sign of other problems, but the US economy is so large I am not sure 600 billion is “large enough” to be problematic. The deficit's relative size would be a good topic for debate.

Should the Government do anything about it?

Government intervention into the economy is dangerous. Look at Bush’s early policy for steel. It was idiotic and did not help anyone. There are tons of examples of bad government economic policy. Ranging from the price of milk to the price of sugar there are just too many special interests involved the US government to be effective.

What is the cause of the trade deficit

America is a Wealthy nation, extremely wealthy by world standards. As others have said, the American people wish to buy more then America can produce, it's a simple cause. It does run deeper though. With a global economy, our goods have to compete globally. As a result, a host of American companies have moved manufacturing jobs out of America to reduce production costs.

We tend to focus on the Labor costs when it comes to reducing production costs. However, other countries are happy to get the work for their citizens (and the resulting income tax revenue) so they work sweet deals the usually result to low if not no taxes on that business. Also, many parts of the world do not drown their industry in red tape. We may like OSHA, Environmental, EEOC, Transportation, etc regulations, but they all cost companies money to maintain these standards, as well as administrative dollars to maintain records of these standards. Many other countries in the world do not apply these things to industry, so production costs go even lower. As more companies move out of the US to reduce their production costs to levels that allow them to compete globally, we end up with higher and higher trade deficits (not to mention less manufacturing jobs in the US).

One thing we need to consider though, is there really a trade deficit at all? A problem with these numbers is that we count trade with US company subsidiaries abroad as part of this deficit. Though, in some instances these operations abroad cause a reduction in jobs in America, trade with them is good for the America based company, the company's stock holders as well as the company's customers (who generally get the company's goods at a cheaper price as a result).

Another thing we fail to consider when it comes to the trade deficit is that as we buy goods from other countries they become economically stronger. As they become economically stronger then tend to invest more, frequently in the US. That investment means growth of US companies which means growth for our economy.

I good CATO Institute paper on this (though it is several years old) can be found here.


Is the trade deficit good for America and why or why not?

In many ways the trade deficit is a non-issue. More imports tends to mean cheaper goods for Americans, which means they can stretch their budget farther. More money going from America to other countries also tends to lead to more foreign investment in America which helps our economy.

But there are other ways we benefit. In the 1970s, the American Auto Industry was designing cars to last 5 years. They wanted American's buying cars twice a decade, as this helped their bottom line. Back then a car that was approaching 100,000 miles wasn't worth a nickle to anybody.

Because my father was an employee of General Motors for 31 years, I heard all of the anti-trade deficit arguments and nightmare scenarios. I had an "inside look" of sorts that gives me a different perspective. When the Japanese cars began to dominate the market the US auto industry and the United Auto Workers union had one voice. They were furious, this was costing US jobs, they were taking US business, etc. They were correct about the cost, but not the cause.

The reason Japanese cars were so successful with the American public was the quality of their manufacture, moreso then their cheaper cost. This resulted in the US auto companies having to vastly improve the quality of their products to compete, as well as modernize their manufacturing process to reduce production costs (my father eventually saw this as a positive, though he still wanted the US auto industry protected).

Then the Japanese car companies, in an effort to reduce the costs of bringing their products to the US market began to build assembly plants in the US. This brought more jobs to the industry in America. At the same time, the US, in a effort to be more competitive began to purchase more and more parts for their cars from overseas, reducing jobs in this industry. As a result is that these days, it is rather difficult to tell which car is actually more "American".

In the end, the issue of the Japanese car became a non-issue. As we began to see benefits from this foreign trade, some began looking for other reasons for American Job / Productivity loss. Corporate greed / shareholders demands will always be on the list. However, the exceedingly high cost of doing business in America, due to excessive regulation is right there at the top as well.

This is not to say that we should abandon regulation of Industry. Regulation has made the air cleaner, jobs safer, etc. But we could start considering a different approach. For example. These regulations change constantly, resulting in billions spent by US Businesses as they try to adjust to stay in compliance. If we consider limiting changes to regulations to once every 10 years, we could make a huge dent in this cost to American industry, without reducing our standards.

Another approach to reduce costs would be to change our enforcement approach. Instead of depending on fines and treats to keep businesses in line, we could look at financial rewards (like tax deductions) for businesses that meet the current standards. This could shift businesses approach to regulations entirely as stockholders start to see regulation as a potential source of higher profits, rather then just a liability.

The Trade Deficit has resulted in higher investment in US companies, higher standards for US goods and cheaper prices for US consumers. It has also resulted in a reduction in jobs in the US. When comparing the pros and cons I think that at worse, the TD is a non-issue and at best it is actually beneficial to the Average American.

Should the Government do anything about it?

Yes and no. The government should take no action to directly try to regulate the trade deficit.



I agree totally. The government has a pretty poor track record when it comes to economic issues and I would dread to see how badly they would mess up the US economy if they began to fumble around here.

But the ideas I listed above, for addressing the cost of doing business in America would be one area they could try to improve the economy / trade deficit / business climate in America, while also possibly reducing the cost of government.