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The upside of the trade deficit: More foreign investment in the U.S.
The upside of the trade deficit: More foreign investment in the U.S.
We got an early look at the balance of trade Thursday morning. Imports in February were more or less flat after surging in January, according to the U.S. Census Bureau. Meanwhile, exports picked up.
All in all, the trade deficit shrank a little from the previous month. But that gap between imports and exports is just about the widest it’s ever been.
President Donald Trump has demonized the trade deficit. And he’s argued that tariffs can help boost American exports and narrow the trade gap. But the thing is, that negative trade balance also has an upside.
Think about the United States as one big household that really loves going out and buying imported goods. To pay for those goods, the household has a of couple options.
“One option is you can export to pay for your imports. The other option is that you can borrow to pay for your imports,” said Robert Johnson, an economics professor at the University of Notre Dame.
He said the United States simply can’t export enough products to pay for all of those imports. We just don’t make enough stuff that the rest of the world is buying.
But we do have financial assets that foreign investors want to buy. Think stocks, mortgage-backed securities, Treasury securities — as in government debt.
“As a result, foreigners want to pour money into the United States, in safe assets in the United States. And that has made it very easy for us to borrow from abroad,” said Johnson.
It’s not like the same foreign manufacturers that are selling us goods are turning around and buying U.S. Treasurys.
But George Pearkes, macro strategist at Bespoke Investment Group, said at the national level, foreign demand for U.S. government debt and other financial assets allows us to import more than we export.
“There is no other way to make that work,” Pearkes said. “If you’re going to spend more than you earn, then you have to, have to, have to either be increasing debt or decreasing assets.”
What this means is that the trade deficit and foreign investment in the U.S. are two sides of the same coin.
Let’s say the U.S. could magically figure out how to eliminate the trade deficit by making exports catch up with imports.
Emily Blanchard, a professor at Dartmouth College, said the tradeoff would be less foreign investment.
“That means we lose a critical source of lending,” said Blanchard.
She also said boosting exports would require an increase in capital investment. And those resources couldn’t go to other parts of the economy — building bridges, educating kids, coming up with innovation.
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