Is it unlikely (or even impossible) for the USA to increase its wealth while it has a trade deficit?
It’s rare that commentators ask this. Yet I think the question is absolutely critical for the USA's future!
I really think that it is very unlikely for the USA (as a country, everyone combined, not just the public or the government) to increase its overall wealth as long as the USA has a trade deficit!
Why? Well, think about it.
The trade deficit means that, by dollar value, people in the USA bought more goods and services from foreign countries than they sold to foreign countries.
A business can't profit if its revenue doesn't exceed its costs. So why should it be any different for the USA? The two aspects of the analogy might not be identical, but they are similar.
By the way, I assume (but am not positive) that the trade deficit measures all
types of products and services that comprise revenue and costs. If I'm wrong about this, it could mean my assumption is wrong. If that's the case, I hope someone will correct me. Perhaps it excludes investments in USA financial products?
But even if the trade deficit excludes some other products, I doubt their value would be large enough to offset the massive deficit.
Again, a trade deficit means the value of exports are less than the value of imports, of course.
If you think about exports, those are crucial! If you sell products to foreigners, and get their cash, the USA as a whole is richer. But if you are selling products to your own countrymen, the USA is not becoming wealthier overall; the money is simply redistributed from USA customers to USA sellers!
As for imports, they aren’t a complete
waste. After all, when you buy something from a foreigner, you are getting something in return: an asset. It doesn’t just disappear...or does it? Well, in a consumer society like the USA, I would think that a lot of imports are things that you don’t require, that do
eventually essentially disappear from common use, things like TVs, clothes etc. TVs are replaced, clothes get ripped and kids grow out of clothes…so they do disappear, in that sense.
This means that when a family buys two TVs over several years, at the end of that period, their wealth has increased only by the value of the second TV. The first has been tossed!
Now, the foreigners that buy our exports would toss some of their purchases too…but because the USA buys much more than they do, the USA tosses a greater dollar value of goods than the foreigners do, and hence the wealth of the USA decreases by a greater absolute value, in that respect.
I would like to know how much of the USA imports are consumable or typically replaced within a few years. I would be surprised if it’s not a significant portion of imports!
This appears to be the history of the balance of trade:http://www.census.gov/foreign-trade/statistics/historical/gands.pdf
Look at that! During the 37 years from 1973 to 2009, there's been a deficit, and the deficit is trending higher and higher!
My thesis is that the USA may be losing wealth every single year there is a trade deficit! (Although during the years that the deficit was small, it's possible wealth was not lost).
Someone may counter by saying: how can that be? GDP (the total goods and services produced by the USA) is growing virtually year over year!
Well, the GDP measure tells you little in this respect. This is because GDP could be growing as a result of the USA borrowing money, and borrowing money is not
an increase in wealth, it's actually a decrease
in wealth, assuming you pay interest to borrow! (And the USA has certainly been borrowing more money than it earns in tax revenue. This is shown by the other large deficit, the budget deficit, and the debt of about $13 trillion).
Think about it. The country could be organically shrinking as a result of buying far more goods than it sells. Yet if the country is also borrowing massive amounts of money at the same time, and plowing that money into the economy, that economy will create goods and services and GDP will be much higher than it would be had the borrowing not occurred!
This means that borrowing and GDP growth are masking the shrinking of the country’s wealth!
The implication of this is frightening! It means that the USA may have been shrinking each of the last 37 years!
If this continues, what will happen? Well, I suppose endless trade deficits would mean a country would shrink and shrivel! At the very least, it would eventually become a third world country!
Now, I’m not suggesting that endless trade deficits will occur indefinitely. As China becomes wealthier and pays its workers more, the cost of goods will become more expensive and the USA should import less.
But when will that occur? And what shape will the USA be in by then?
Why is the trade deficit not mentioned as often as its importance would justify? Why are the consequences of it not emphasized as much as you'd expect? For something so shocking to occur for 37 years straight...there should be alarm bells ringing!