Honestly, usually I think for more than 30 seconds before I post. I could tell while I was writing this that I sounded like an idiot, but I am just going with it anyway.
I railroaded you with pre-packaged HTML.
The widgets show up in the national capital stock. The current account measures income, not capital, hence deficit. But yes, deficits confuse hell out of me too.
You trade goods for assets. China buys Treasury bonds, and the US uses the money to buy goods imported from China (for example).
I'm all for trade deficits. China sends us iPhones, Kuwait sends us oil, Canada sends us lumber, we send them all green pieces of paper with pictures of our Presidents on them.
The US runs a large current account deficit because of its peculiar role in the world economy. Most of the leading economies -- China, Japan, South Korea, Germany -- deliberately run a current account surplus essentially as a matter of policy. If they run a surplus, somebody else has to run a deficit. That somebody else is the US. The US is also a haven for people stashing wealth, which contributes to the deficit. (The UK, Canada, and Australia also run large current account deficits, so maybe it's genetic.)
8: Possibly. Pre-WWI Britain financed its trade deficit out of foreign investment income.
When they get sick of green pieces of paper with presidents on them, we can send them slightly off-green pieces of paper with Harriet Tubman and Lin-Manuel Miranda on them.
In principle, a large and sustained current account deficit leads to foreign ownership of capital stock, that is to Chinese ownership of assets that really matter rather than just pork farms and VPN software vendors.
Speaking about this for the US is pretty far removed from (my understanding of) current reality of interconnected trade. For smaller countries, especially those which run deficits like Greece, not so academic-- Greece's main port has foreign owners. For a positive example, after 1990, Czechoslovakia was basically starved of capital, needed foreign money to modernize. Korean and Japanese ownership of Slovakia's main assets (auto factories) is a net gain for SK for many years.
So not an economist, but my understanding is that once we import the widget, it adds to the trade deficit and it becomes, per above, an asset. Then we either
1)consume it and that addition is made permanent
or
2) turn it into something else. If that something else is exported, the new value is deducted from the trade deficit. If it isn't, see 1.
If a tourist to the U.S. eats a meal here, it only counts as an export if they don't move their bowels until they leave the U.S. That's why food at vacation spots is so low in fiber.
I'm not going to take the time to refresh my memory on some important details of this, so please excuse the hand-waving.
In part, trade deficits are important because they are directly related to currency issues--if the US runs a deficit, it means that other people own dollars, because we pay them in dollars for the stuff they sell us. The willingness (even eagerness) of other people to own dollars means *by definition* that we have a trade deficit (this is called the national income accounting identity--OK, I looked one thing up). If we were selling more things to other countries, people in the US would have more dollars and less stuff.
Importantly, a trade deficit also means that we are a net-borrowing nation (that is, our national investment is larger than our national savings each year). How do we have more investment than savings? People in other countries, with their dollars that they got by selling us stuff, invest in the US. Most of this is US Treasury Bonds, but it's also real estate (all those Russian mobsters in Trump Tower!) and factories. We buy cars from Toyota (dollars leave the US, cars enter the US) and then Toyota turns around and spends those dollars building factories in the US, because they've got to park their dollars somewhere, and US factories are (for them) a good investment.
Rather than thinking about the trade deficit as a question of imports and exports and failing manufacturing and the trials and tribulations of the white working-class, we *could* think about it as a saving/borrowing/investing question. If people (companies) in the US saved more (in practice, this means borrowing less, because we're a loooooooong way from net positive savings) our trade deficit would drop, because our national savings rate would go up. (There's a formula that proves this--I'm not looking it up.) And in fact, this happened! During the 2006-2009 recession, our savings rate went way up, because banks stopped lending money to homebuyers, so the total value of mortgages nationwide plummeted. And our trade deficit shrunk! Just like the math says.
Except, it only shrunk in nominal terms, because here's the catch--if we save more, we're increasing the demand for dollars (saving, for us, means owning dollars). If other countries aren't willing to give up owning dollars (that is, if they're not willing to keep more of their own stuff instead of selling it to us, and if they're not willing to stop stashing their savings in US Treasury Bonds) then the value of the dollar just rises. Making it cheaper for us to buy stuff from other countries, because we can get more for the same dollar. Driving the trade deficit up again. So in real terms, even when our savings increased (borrowing decreased) the stronger dollar made up the difference in the trade deficit.
End of a very long story: as long as people and companies in other countries are very, *very* interested in holding their savings in dollar denominated assets (actual dollars, US Treasury Bonds, US real estate, oil) we will have a trade deficit, no matter what. If you'd like to convince the Chinese that US assets are a risky proposition and they should really invest in the euro, be my guest: but it will make for a less stable and less wealthy US.
If you'd like to convince the Chinese that US assets are a risky proposition and they should really invest in the euro, be my guest:
CURSES! MY FIENDISH PLAN HAS BEEN EXPOSED!
14: Interesting. Profit repatriation would then lead to the same process - more profits repatriated=more forex turned to dollars=a stronger dollar. The broader point in the linked pieces is the inadequacy of traditional national accounting measures. For instance this graph shows US profits sitting in tax havens reaching ~1.4% of US GDP in 2015, when the trade deficit was ~2% of GDP (if I read it correctly). That's a really enormous quantity of American wealth that's invisible to normal indicators and generally missing from political conversation.
More here, about the degree to which Americans actually own economic growth elsewhere. eg:
It is useful in this respect to compare the past rise of Japan with the present rise of China. When Japanese electronics and automobiles began flooding Western markets in the 1960s and 70s, this was reflected both in a rising Japanese trade surplus and GDP and in the strengthening of Japan's major corporations, many of which became household names. China, meanwhile, has seen its trade accounts and GDP soar in the age of globalization, and has become the world's biggest exporter of electronics since 2004. Yet this growth has not been matched by the emergence of Chinese firms as world leaders in the field. Ninety per cent of what China Customs classifies as high-technology exports is actually produced by foreign-owned companies. Thus, while an increasing share of global manufacturing takes place in the PRC, much of this production is controlled, directly or indirectly, by outside interests. The contrast with Japan's earlier ascent is stark. Any survey of global economic power must therefore take account of this shift, which means focusing our attention on the world's leading transnational corporations.
Echoing Roadrunner a bit:
I think it is useful for thinking about trade deficits to imagine that all transactions use actual cash money rather than bank/electronic transfers.
So when you buy $1m in widgets from company A in foreign country C, you get a bunch of widgets that you bring to the U.S. and that are presumably useful here. The company that sells you the widgets gets 1m green pieces of paper that it takes back to C. That paper is useless in C; the only way for A to get value from them is to bring them back to the USA to buy something. If there are wodgets here that are needed in C, great -- A buys them and takes them back to C, and there's no trade deficit. But if C doesn't need any of the wodgets that the USA makes, A's only choices are to (a) trade the green pieces of paper for the blue pieces of paper that serve as currency in C, thus driving down the dollar and up the C-note and reducing the US trade deficit, or (b) to invest in capital goods in the USA that will pay off later, allowing A to buy wodgets later once the USA figures out how to make wodgets for the C market. The more of (b) that it chooses, the more of the profits of US capital flow out of the country, and the poorer we are.
Echoing Roadrunner a bit:
I think it is useful for thinking about trade deficits to imagine that all transactions use actual cash money rather than bank/electronic transfers.
So when you buy $1m in widgets from company A in foreign country C, you get a bunch of widgets that you bring to the U.S. and that are presumably useful here. The company that sells you the widgets gets 1m green pieces of paper that it takes back to C. That paper is useless in C; the only way for A to get value from them is to bring them back to the USA to buy something. If there are wodgets here that are needed in C, great -- A buys them and takes them back to C, and there's no trade deficit. But if C doesn't need any of the wodgets that the USA makes, A's only choices are to (a) trade the green pieces of paper for the blue pieces of paper that serve as currency in C, thus driving down the dollar and up the C-note and reducing the US trade deficit, or (b) to invest in capital goods in the USA that will pay off later, allowing A to buy wodgets later once the USA figures out how to make wodgets for the C market. The more of (b) that it chooses, the more of the profits of US capital flow out of the country, and the poorer we are.
Echoing Roadrunner a bit:
I think it is useful for thinking about trade deficits to imagine that all transactions use actual cash money rather than bank/electronic transfers.
So when you buy $1m in widgets from company A in foreign country C, you get a bunch of widgets that you bring to the U.S. and that are presumably useful here. The company that sells you the widgets gets 1m green pieces of paper that it takes back to C. That paper is useless in C; the only way for A to get value from them is to bring them back to the USA to buy something. If there are wodgets here that are needed in C, great -- A buys them and takes them back to C, and there's no trade deficit. But if C doesn't need any of the wodgets that the USA makes, A's only choices are to (a) trade the green pieces of paper for the blue pieces of paper that serve as currency in C, thus driving down the dollar and up the C-note and reducing the US trade deficit, or (b) to invest in capital goods in the USA that will pay off later, allowing A to buy wodgets later once the USA figures out how to make wodgets for the C market. The more of (b) that it chooses, the more of the profits of US capital flow out of the country, and the poorer we are.
the more of (b) that it chooses, the more of the profits of US capital flow out of the country, and the poorer we are.
Don't disagree, but a big portion of that recycled money actually goes into T-bills, which pay low to negative returns, and for which the US can to some extent set the interest rates. So the situation is much less bad than it sounds.
I think there are probably distributional issues. If the T-bills were then used for government spending on infrastructure (as opposed to keeping tax rates low), that would probably work out better for the people who would have been employed in the U.S. if the capital stayed here.
Anyway, I think this goes back to Richard Ricardo. When you have free trade, the holders of the relatively abundant factor (capital in the case of the U.S. trading with China) gain.
"Lucy, you got some 'splaining of the theory of comparative advantage do to."
I'm both dead and non-existent, so spelling my own name is too hard.
On some level trying to account for "dark matter" based on macro statistics seems like a fools errand, given the measurement problem. In the 06 piece Setser says we don't owe much to emerging market countries, but then in the same breath mentions that we do owe lots to the Caymans. You know, the jurisdiction where lots of emerging market borrowers incorporate their bond issuers. And how on earth do you measure the market value of FDI, given that much of it (from the US anyway) is private, illiquid and accounted for at amortised cost assuming it shows up in accounts at all?
30: Yes. I think the most solid information was in the graph I linked in 16, based on foreign profits declared but not repatriated.
32: That does make more sense. IIRC he says lending/investing to and from the 3rd world is small compared to flows within the rich world. Which makes good sense.
I also think the quote in 17 is somewhat overstated. Certainly the rise of China's manufacturing/export industry is materially different from Japan's or the US's in earlier times, but it's no longer true to say it's mostly controlled by outside interests. Chinese companies own the budget smartphone market globally, to give one example.
32: That does make more sense. IIRC he says lending/investing to and from the 3rd world is small compared to flows within the rich world. Which makes good sense.
I think that's less true now than it was in 2006, but even accepting it's true, I'm still not sure that there's anything mysterious to explain. Certainly tax arbitrage and offshoring of profits by US companies is a real thing (and probably worse than Setser said, given the way companies were able to avoid taxation altogether by sharing profits between two jurisdictions with misaligned tax laws). But it's really not mysterious that US firms would look to invest in higher yielding opportunities abroad, while foreigners would look to the US for safe, ie low yielding, investments.
When does the U.S. political scene become shitty enough that they stop looking here for safe investments? Scaring the foreign rich people so that they demand fewer T-bills might drop the value of the dollar and thus encourage exports. I can't see any other way Trump might help the American worker.
This make my head hurt. I need a cookie.
Chinese companies own the budget smartphone market globally, to give one example.
That just means that they assemble them, though. Who's getting the added value from a Lenovo or LG smartphone?
Don't they assemble the high end smart phones too? We know who gets the added value there. Ghost Steve Jobs.
39/40 are true. Some like Xiaomi are moving upstream into design and branding, but AFAIK with very little success outside China.
I think I'm going to stick with Samsung. I'm trying to spend more time hiking and it's good to have a spare fire starter.
That just means that they assemble them, though. Who's getting the added value from a Lenovo or LG smartphone?
I was thinking more along the lines of Huawei, Oppo, Xiaomi etc. I guess they use other companies parts to a certain degree, but the same's true of Apple et al.
When does the U.S. political scene become shitty enough that they stop looking here for safe investments? Scaring the foreign rich people so that they demand fewer T-bills might drop the value of the dollar and thus encourage exports. I can't see any other way Trump might help the American worker.
Depends what happens elsewhere in the world, really. There was a time when they might have turned to Europe, ie Germany, but the Eurozone crisis and negative yields on Bunds kind of put paid to that.
The cheap smartphone brand in Latin America and the Caribbean is BLU, which I am surprised to find out is an American company. Their manufacturing is in India and Brazil. So I guess China isn't the only one in the game.
Are they any good? I see them listed here and the price is good.
