When the balance of trade is such that net imports exceed net exports, it is considered a trade deficit. Using the trade deficit as an economic indicator, politicians look at it and automatically assume that the country is incurring a net loss. This phenomenon has recently garnered attention amongst American politicians regarding China. Members of Congress see a trade deficit, and they want to blame China. The most recent form of such animosity is the Emergency China Trade Act, which essentially is a punitive piece of legislation for China’s inability to appreciate its currency quickly enough. In spite of there being legitimate criticism regarding “currency manipulation,” the real reason for Congress passing the bill is to give into the populist gripe of “our jobs were sent overseas!” With no economic recovery in sight, it is understandable from a political standpoint why Congress would want to blame China. Objurgating China takes the pressure off of the United States Congress for a lack of job creation and economic recovery.
Much of Congress’ decisions are made based on their misunderstanding of trade deficits. More than a century ago, Frédéric Bastiat already showed how a “trade deficit” can turn profit. Milton Friedman also points out that American dollars come back to the United States, typically in the form of foreign control of assets. This assertion is confirmed by government statistics. In 2010, other nations spent $59 billion a month on U.S. Treasury Bonds. Furthermore, foreign direct investment in America averaged to $19 billion a month. These investments de facto offset any trade imbalances one sees, as was reported back in 2010. Rather than trade deficits causing economic disfunction, they are a sign of positive economic health. Looking at BEA records that date back to 1980, each time that trade deficits were agglomerated, GDP growth was higher when trade deficits were increasing than when the deficits were contracting (3.6% and 1.0% respectively).
In addition to the fact that deficits are not as harmful as one would think, America has been running trade deficits long since before the Great Recession. U.S. Census data shows that trade deficits have been accrued nonstop since 1976, and trade deficits have been a part of American economic history since before China’s economic reform in the late 1970s. Every year for which the U.S. Census Bureau can account, there has been a trade deficit with China. Trade deficit with China is historically nothing new. However, using trade deficits as a scapegoat is a very politically expedient move.
Furthermore, America is a nation obsessed with consumption. Microcosmically, American citizens have a poor propensity to save. From 1982 until the Great Recession, the personal savings rate was only two percent of personal disposable income (DPI). Even with the recession, the personal savings rate only reached 5.9%. Consumer credit is currently at $2,444.9 billion, which would average to $11,064.94 per citizen. The macrocosm of the United States federal government is not any less flattering. With gross GDP considered, public debt is 92.3% of the GDP.
Recent congressional dealings with the debt ceiling were a reminder about debts in general. Running up a deficit is not inherently a bad idea. If one is able to pay their debts, running up deficits are advantageous in the short-run. However, if there is no solid plan to pay those debts, the result is much like the current economic malaise.
In summation, putting the spotlight on the trade deficit with China is unwarranted. Trade deficits are nothing to fear when foreign direct investment is taken into consideration; trade deficits actually signal good economic health. Congress’ misperception of trade deficits is resulting in poor economic policy. Rather than displaying malevolence towards one of their largest trading partners that is a rising power, perhaps the United States should focus on its domestic policy to mitigate the truly problematic deficits.
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