Make America wait again

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