Stymied in building the Great Wall of Mexico, the
president of the United States is trying to brick up a bigger wall around
trade. Donald Trump berates the Germans
for their trade surplus with the US; proposes to rewrite a trade pact to limit
the surpluses of Mexico and Canada; and, I presume, would extend the same
principle to Kazakhstan’s surplus with the US, totaling $216 million in goods so
far this year. Trade deficits, Trump avers, weaken the US economy.
In reality, a trade deficit is a blessing in disguise. Recall that this deficit is the excess of goods
that a nation buys abroad (imports) over what it sells abroad (exports). If
Kazakhstan sells $3 million of oil to the US in exchange for $2 million of
automobiles, then the US has a trade deficit with Kazakhstan of $1 million. In
a sense, this cool million is a gift to the US. It doesn’t have to give up any
SUVs for the extra petroleum – just green pieces of paper called dollars, which
it can print virtually for free.
Of course, what tees off the Trumpists is the loss of
oil jobs in the US: Why shouldn’t America produce oil for itself? The answer is
that it’s better at producing cars -- that’s why Kazakhstan buys from Detroit.
Shifting derrick workers to auto factories (albeit indirectly) puts them in
more productive jobs where they can earn more. But this doesn’t happen
overnight, and the workers meanwhile are angry and unemployed. Hence President Trump.
The Trumpists fail to see that limits on trade
deficits harm the rest of the American economy.
To build another factory, Ford must borrow if it doesn’t have a few
spare billion bucks at hand. But it can’t borrow from foreigners unless they
have dollars, which they earn by selling oil and toys to the US. If Trumpists
block these sales, foreigners won’t have dollars to lend. So much for the
Trumpists’ vaunted plan for economic growth.
If Trumpists really want US firms to build plants,
then they can cut the federal deficit – that is, the amount that Washington
spends that it can’t cover with tax revenues. Reducing the deficit will free up
money to pay for factories. But in reality, the Trumpists propose tax cuts that
will swell the federal deficit. To pay for the new debts, the federal
government must borrow money in competition with firms. This will raise the
interest rate and thus the cost of building schools and warehouses. Trump’s real
motto: Make America Wait Again – wait for growth.
--Leon Taylor
tayloralmaty@gmail.com
Notes
A simple equation makes clear the ties of trade to the
rest of the national economy, by showing how the nation can raise money for
real investment (i.e., investment to build things, as opposed to financial
investment).
People either spend their income on products or taxes,
or they save it. Denote income as Y, consumption as C, taxes as T, and savings
as S. Then Y = C + S + T.
We can also think of income as the value of what the
nation creates. Its goods and services are either for consumers, firms,
government or foreigners. Denote products for consumers as C, for firms as I
(for real investment), for government as G, or for foreigners as X – M (exports
minus imports). So Y = C + I + G + (X - M).
Equate the two expressions for Y:
C + S + T = C + I + G + (X - M).
Simplify and solve for real investment:
I = S + (T - G) + (M - X).
This says three sources can finance investment:
Private savings, the government surplus (that is, tax revenues that the
government has not yet spent), and foreign savers (who earn dollars by selling
more to the US than they buy from it). The term M – X is the trade deficit,
which in this appendix includes services as well as goods.
The distinction between goods and services can matter.
In the second quarter of 2017, Kazakhstan had a surplus with the world in goods
of $4.2 billion – but a deficit in services of $1.1 billion.
References
Steve Munson, Joshua Partlow and Alan Freeman. US
neighbors see increasing risk of failure in NAFTA talks. Washington Post. October 7, 2017.
National Bank of Kazakhstan. Balance of payments of
the Republic of Kazakhstan: Analytic presentation. http://nationalbank.kz/?docid=199&switch=english
United States Census Bureau. Trade in goods with Kazakhstan. https://www.census.gov/foreign-trade/balance/c4634.html
