The trade-offs of the trade deficit

Make Me Smart April 30, 2024 Transcript

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Kai Ryssdal 

Here we go. Hey everybody, I’m Kai Ryssdal. Welcome back to Make Me Smart, where none of us is as smart as all of us.

Kimberly Adams 

And I’m Kimberly Adams. It is Tuesday, April 30. Last week, we heard from Tamra in Colorado, who said that she thought she knew about trade deficits. But after learning about the history of the US trade deficit, she realized that there was a bit more to the story, as there is for so many things. And what we also then heard from some other folks who had follow up questions about that.

Kai Ryssdal 

So, we are going to dig into the trade deficit today, why we have one, what it means for the American economy. Also, the global economy, by the way. Here to make us smarter about that is Eswar Prasad. He’s a professor of trade policy at Cornell. Also, a senior fellow at Brookings press. Professor Prasad, welcome to the program.

Eswar Prasad 

Nice to be on, Kai.

Kai Ryssdal 

So, in layman’s terms, if you would sir. What is a trade deficit?

Eswar Prasad 

A trade deficit is basically the difference between the amount of stuff a country exports to the rest of the world, minus the amount it imports from the rest of the world. So, when you import more than export, you have a trade deficit. And it usually means that a country is sort of living beyond its means. It says you earn a certain amount of income in a given period, and you decide to spend a lot more. So, somebody’s got to give you that stuff and pay for it. And that’s what the US has been doing.

Kimberly Adams 

And it’s not just like physical stuff. You know, it’s services as well, right?

Eswar Prasad 

Oh, that’s an interesting twist. So, when we think about trade, normally, we think about stuff, you know, computers, cheap stuff at Walmart, and so on. But in fact, it turns out there is a very important category of trade called services, which includes things like tourists going abroad or tourists coming to the US, students coming to my university and paying tuition. So, when foreign tourists come to the US, when a Chinese or Indian student comes to the US and pays tuition, that’s an export by the US. So, the US is basically exporting its educational or tourist services to the rest of the world. So, when you look at the overall deficit, it’s a deficit or balance of goods and services. And it turns out that the US actually does quite well in terms of services. It has much more services, exports and imports, but it doesn’t do quite as well on goods where there is in fact, a deficit.

Kai Ryssdal 

All right, so it’s value judgment time. Are trade deficits good or bad, or neutral?

Eswar Prasad 

As with most things in economics, Kai, it depends. So, it turns out that if you’re an American consumer, then it’s a pretty good deal to have cheap stuff coming from the rest of the world. Because the nice thing about imports is that they introduced more competition for domestic manufacturers. So, when the Japanese are shipping over cars in the 1970s and 80s to a great extent, that kept prices down for cars, which is good for American consumers because they could buy cheaper cars. The problem though, is that if you were an auto worker in Detroit, you were not that happy because now the competition from Japan would mean that essentially, you might not have a job. And this is true of basically every category of imports, that those imports reduce prices or for a small variety. But for workers in the affected industries, this can be a problem. And this, in fact, is one of the big concerns about the trade deficit that the US has been running with China. Now, as with the broader deficit that we spoke about, it turns out that we buy a lot more stuff from China than we ship to China. But we do send a lot more services exports to China. But when it comes to the goods exports that China has been sending us, you know, computers, electronics, a lot of cheap stuff that you can get at Walmart, all of that certainly affects jobs in those industries. So, it’s a mixed bag. More and cheaper stuff, but job losses.

Kimberly Adams 

Right. So, I imagine then that there’s some, depending on what camp you’re in, disagreement over, you know, that value judgment, we were just trying to get at whether it’s good or bad. But then when it turns to policy, do governments tend to think that trade deficits are good or bad?

Eswar Prasad 

Now, it turns out that the politics gets even more complicated than the economics. So, in the scenario I laid out, you know, if you get imports, it makes everybody a little happy. Let’s say that you have competition for cars from the rest of the world. You know, we have much more variety as consumers of cars. We get cheaper prices, but maybe each of us gets a small benefit, maybe a few $100 worth, maybe even a couple of $1,000 worth. So, that helps. But you know, you’re not going to vote on the basis of that small benefit. But if you’re a worker in an industry that is hit hard by imports, that is going to make you much more concentrated in terms of your pain, and perhaps you will vote based on that. So, governments tend to be much more responsive to the costs associated with running trade deficits than the benefits that can be got from cheaper and more imports. So, in that sense, deficits do have a political connotation as well. But there is another element to it, you know, I spoke about trade deficits is essentially meaning that a country is living beyond its means. The issue here is that somebody’s got to pay for you living beyond your means. Now, if you’re a consumer, maybe your credit card company gives you some credit. But eventually, you have to pay the credit card company back, and you pay them a pretty high rate of interest. Well, it turns out for the US, there is one very nice advantage, which is that we have the US dollar. So, while the US has been running trade deficits for a number of years right now, the rest of the world has been willing to not only give us a lot of cheap stuff, but also give us money to buy the cheap stuff at relatively low interest rates. So, a lot of foreign countries invest in the US in the stock markets, and especially in the US government bond market, which keeps interest rates here low. So, it’s a pretty good deal for the US getting a lot of stuff from the world, getting financing for getting that stuff and getting cheap interest rates. But yes, there are still consequences in terms of job losses, and those are a big factor in the political season.

Kai Ryssdal 

Well, just because you went to politics. Let’s go that next step farther. And let’s do a let’s do a semi hypothetical here. So, former President Trump, as you know, during his term in office, railed against the trade deficit. And so, play this out for me. What would happen if our trade and I guess, by definition, that would have to be the rest of the planet straight as well, was perfectly in balance? What if we had neither a deficit nor surplus? Would that be better?

Eswar Prasad 

There is one way to do that, which is to raise barriers to trade. What Trump has said he will do in the next term is raise tariffs on imports from countries like China sky high, and that would certainly shut off imports, but those countries might retaliate by putting barriers on US exports. And they might end up in a world where you have a perfectly balanced trade because nobody wants to trade with you because you’ve put up such high barriers to trade. And that’s not so good for an economy because it means that we cannot benefit from specializing in certain goods and services. And that’s where the benefits of trade come from, you know, different countries are better at producing different things. So, by trade, all of them can be better off. There is another twist to the way Trump was viewing the trade deficit because he not only looked at the overall trade deficit, but the trade deficit of the US against every particular country. And that is a bit of an issue because it should be the overall trade deficit that matters more to a country. You might run a trade deficit with one country, run a trade surplus with another country, and it could all balance out. But Trump took it personally. Anytime there was a country that runs a trade surplus with the US. He took that country to task, so Europe, India, Japan, China were all you know, recipients of his abuse because him in his view, anytime the US runs a trade deficit with another country, that other country is not playing fair. And that’s not necessarily true. Certainly, one might argue that there were some countries like China that were putting up barriers to US exports. It may not have been playing fair on trade, but he tarred all countries with essentially the same brush. So, the bilateral trade deficits, that is a trade deficit with one particular country should not matter as much as the overall trade deficit. But certainly, in a Trump term, we’re going to get much more histrionics much more uncertainty about trade policy.

Kimberly Adams 

But at the same time, a lot of those tariffs that Trump imposed are still in place under the Biden administration, and even Biden has talked about raising tariffs in campaigning. And I think it also matters when we’re talking about trade deficits with individual countries, you know, whether they’re allies or not. I mean, what’s the difference between these two men and how they might approach it? We heard the Trump thing, but what about Biden’s role in all this?

Eswar Prasad 

You know, Kimberly, the issue of fairness is really important here. And that resonates with people. The sense that if there is a trade deficit that is the result of other countries not playing fair on trade that really rankles, and that is used by politicians. Now, of course, it’s very easy to blame job losses that have been taking place in some industries for a variety of reasons, like technological shifts, you know, shifts away from certain industries because of changes in consumer demand, and so on. But to pin it all on, you know, foreign powers, like China is a very appealing proposition for a politician. But you’re right, that certain elements of trade policy look very much the same under Biden than they did under Trump. None of the tariffs that Trump imposed on China had been removed by the Biden administration. And certainly, this is one thing on which there is bipartisan agreement. You know, there are very few issues that bring both parties together. But the sense that China is not playing fair. And trade is one thing that certainly unites both parties. But there is a deeper issue here, which is that China, you know, wants to shift away from producing these cheap manufactured products or products where it doesn’t have very much in terms of value added. So, when you get an iPhone that says made in China, you know, not much of that iPhone is really made in China, most of the parts come from other parts of Asia. So, China has been trying to boost its own industry, and it’s looking to the new technology sectors like green energy, electric vehicles, and so forth. Those are precisely the areas that the Biden administration is counting on for a US manufacturing revival. So, now you have the issue of trade, being folded into broader national security and economic security considerations. So, the trade deficit now becomes a symbol of something much larger. A sense that there is this deep-rooted conflict between the economic objectives of the US and China and trade becomes the conduit through which that dispute starts being settled.

Kimberly Adams 

So much farther there for future conversations, but definitely smarter on the trade deficit. Thank you so much. Eswar Prasad, who’s a professor of trade policy at Cornell, also senior fellow at the Brookings Institution. Thank you so much.

Kai Ryssdal 

Professor, thanks a lot.

Eswar Prasad 

It’s been my pleasure. Always fun to talk about the trade deficit.

Kimberly Adams 

Oh, yeah. We’re full of excitement over here.

Kai Ryssdal 

Oh, my goodness. Do it twice on Tuesdays. You know, it’s interesting to hear, you know, most of the time when you hear the trade gap talked about, number one is like a headline. And number two, it’s usually pretty obtuse and opaque. And I think that was a really interesting sort of primer on what it is why it matters and also why it doesn’t matter, right? There’s both of those.

Kimberly Adams 

Yeah, for sure. I mean, especially that point about sort of the bilateral trade deficit really not being the thing. Although it is interesting how so many conversations these days when it comes to politics in the global economy just always come back to China.

Kai Ryssdal 

Oh, yeah. Oh, totally. Thus, as it ever was.

Kimberly Adams 

It was ever thus, or at least in you know, this century. Oh, God I hate when I have to say that out loud. Okay. What do you think about the tradeoffs of running the trade deficit? Or, you know, at least a good trade deficit since we don’t have one in the services as we just learned. Let us know at 508-827-6278, also known as 508-U-B-SMART. We will be right back.

Kai Ryssdal 

News. Kimberly Adams, go.

Kimberly Adams 

Two fun political stories. First one in Politico, because why not? They have a really cool interactive that they posted online today. Well, not interactive. It’s got cool charts. But it’s about the recent campaign finance filings that came in. Now, granted, there’s a huge chunk of money in politics that we cannot see going through Super PACs, and, you know, interest groups and things like that, which is its own thing. But there is a lot of money that we can see. And for all of the attention that I and others give to sort of wealthy donors in politics. Still, the majority of donations are small donations. And I’m going to read this. “The revolutionary impact of online political donations was on vivid display in the last fundraising quarter, showing how small contributions have helped level the field between the most powerful people in the country and a range of charismatic candidates, folk heroes, ideological crusaders, and people running in especially high-profile elections. The ease of giving has dramatically expanded the pool of donors in just a few election cycles and helped campaigns bring in greater hauls than ever before. And as online donations ballooned in recent years, they have become a majority of funds raised by congressional candidates.” And some of the charts here are really astonishing. So, if you look at one of the charts, they say 97.3% of donations last quarter were $100 or less. And it’s made a huge difference in you know, these candidates. And I think when we’re talking about some of the extremes in both parties, and people wondering how a candidate, or a member of Congress like Marjorie Taylor Greene can sort of keep her hold and keep her seat and keep funding her campaign without the support of the party when a lot of the people in the party don’t like her. It’s this. It’s this because she can raise these money from all over the country in really small amounts thanks to the ease of online donations. It used to be that candidates had to rely a lot more heavily on their parties for money to keep themselves going, and you had to play nice with leadership. You had to play nice with people on different committees in order to fund yourself for your next race. Now, they have become increasingly untethered by that need to sort of please the powers that be within their own parties, which means they can kind of do whatever they want. And small dollar donations are one of the reasons for that. And that’s my first thing. And another really quick thing. It’s just a resource I want to point people to that Reuters put together that is interactive and super fascinating. And it is about polling. What you can and cannot learn from polls. It looks into sample sizes, margin of errors, explains these terms and things like that. But it also gives some interactive graphics where you can play around with different sample sizes and with different margins of errors to understand how those things can factor how reliable a poll is, and how different groups are weighted in different types of polling strategies because you’re going to hear and see so many polls in the coming months. And it’s always good to have a bit more data on how they work and how, you know, whether or not to trust certain polls over others. So, both super interesting pieces.

Kai Ryssdal 

A key piece of data there is how to know which polls to trust and which not to because there’s going to be a lot of polls. There have been a lot of polls. Okay, mine is from the New York Times opinion section. It’s a super interesting and very creative use of the medium, which is to say they threw video in with a web thing. They sat down 12 departing lawmakers from Congress, Democrats and Republicans. I think it was nine Democrats and three Republicans. And asked them about Congress, asked them why they’re leaving, how they would characterize things. The questions went like this, what is one word you would use to describe Congress today? What was the most frustrating experience? Did you make a difference? Most of them said yes. What worries you most about the future? The erosion of democracy was the number one answer there. How do you fix Congress? And the answers are fascinating, and I totally recommend it, won’t take a long time. The one thing that none of them said was you have to make hard decisions. None of them said you have to go against your own personal political interest at some point and that I found a little discouraging. But in other parts, it was super interesting. They each claim varying degrees of success. They did think they had made a difference. And these are people who’ve been in Congress for 10 years, 30 years, right? So, they’ve been around for a while. Really interesting, which is not to say the institution’s not broken. And Lord knows I’ve been critical enough of it as it is. But interesting to hear these insiders and why they’re leaving and what they think about the place.

Kimberly Adams 

I’m so fascinated to see the final numbers on departure because, you know, they come out and sort of drips, dribbles and drabs and whatever, in terms of people resigning, choosing not to run for reelection, or getting knocked out in their primaries. There’s going to be a lot of turnovers. I don’t think yet it’s the most turnover ever, but it could be, depending on what happens between now and November. And a lot of the sort of old institutionalists are just so discouraged with the inability to get anything done. And they’re just like, forget it, not even trying anymore.

Kai Ryssdal 

Just watch this, especially the thing that that says, you know, do you think you made a difference? Because they all said, oh, yeah, we did. And whether it’s, you know, bringing money home or being the first woman to chair a committee or all that stuff. Super interesting.

Kimberly Adams 

And that is interesting because like, what is your actual job as a member of Congress? Is it for the country or for your district? And that can, I imagine, depend a lot on how much of a difference you think you made. Anyway, that’s it for the news. Let’s do the mailbag.

Mailbag

Hi Kai and Kimberly. This is Godfrey from San Francisco. Jessie from Charleston, South Carolina. And I have a follow up question. It has me thinking and feeling a lot of things

Kimberly Adams 

Last week, Nova and I talked about the news that construction is starting on a high-speed passenger train between Southern California and Las Vegas. And we got this from Ben in Omaha.

Ben

I have been begging for trains for decades now. I live in little, tiny Omaha, Nebraska, and we are a three-hour car ride from Kansas City, and the fastest train in the Kansas City from Omaha is 17 hours. It goes through Iowa, through Illinois, back across Missouri. Also, I would love to have a high-speed train that went from Omaha to Chicago and Omaha to Denver. If we can get to Denver or Chicago in like, two hours. Man, that would be awesome.

Kimberly Adams 

I once looked into taking the train from DC back to St. Louis, and I think it was like 28 hours. And it’s like 15 hours driving.

Kai Ryssdal

Yeah. Yup, that’s rough.

Kimberly Adams 

Are you looking forward to taking that train to Las Vegas for a party weekend, Kai?

Kai Ryssdal 

I’m not a train guy. I’m not a Las Vegas guy, so I’m going to let that one pass me by. All right, one more. Last week, Kimberly and insert guest host name here because I was not listening because I was away mentioned the study that found people think old age starts later than it used to. And we got this.

Chris

Hello, this is Chris from Levittown, Pennsylvania. I think some of the perception of old age might be tied to Americans delaying many life milestones such as getting married, having children, or buying a house. My parents, born in 1950, were married at 24 and had their first child at 27. I didn’t get married until 27. And my first child was born when my wife and I were 32. I’m almost 45, and I have a hard time thinking of myself as middle age as I chase my seven-year-old around the playground.

Kai Ryssdal 

Amen. Amen, my brother. A freakin men.

Kimberly Adams 

That is such a good point. That’s such a good point. People delaying homeownership because it’s completely unaffordable. Staying in college longer. Jasper.

Kai Ryssdal 

That’s so funny. Is he like having a bowl of cereal? What is that noise?

Kimberly Adams 

So, I spent so much money at the vet today. This is a total aside. He’s been losing a lot of weight. And so, one of the ways that they told me to help him gain more weight is to put food in more places around the house, and I neglected to remove his collar before recording, so he’s eating the food directly behind me.

Kai Ryssdal 

Oh, there you go. It’s all good. We don’t want Jasper losing too much weight.

Kimberly Adams 

No, no, we do not.

Kai Ryssdal 

All right. So, let’s see. Before we go, we will leave you as we always do with this week’s answer to the Make Me Smart question. What is something you thought you knew but later found out you were wrong about? This answer comes to us, along with Jasper, from Caroline Owens. She works with sheep that graze in a solar field in Pennsylvania that we talked about a couple of weeks ago. Here you go.

Caroline Owens

The thing that I didn’t expect when I took on this assignment was how pleasant it would be to be on the solar field with my sheep. When I come to monitor them, I am surrounded by birdsong. There’s always different blossoms and as the spring comes on, there gets to be a lot of butterflies and bees buzzing all around me as I go up to the sheep. If the grass is getting low, I’ll call them and they’ll bah and trot expectantly up to me. And the young ones jump and bounce because they’re really excited about a new place. And they go into the fresh paddock with the tall new grass, and immediately drop their heads and start grazing again. Just makes me feel really good to see how happy they are. I tell them they’re the lucky sheep in the flock because not everybody gets to go onto a solar field. And I think they understand.

Kai Ryssdal 

That’s a good one. That sheep thing was crazy. That’s great. That’s great.

Kimberly Adams 

Oh, man, that just sounds so idyllic, you know. You know, the sort of pasture scene with sheep but high tech with solar panels. We want to hear your answer to the Make Me Smart question. Our number is 508-827-6278, also known as 508-U-B-SMART.

Kai Ryssdal 

Make Me Smart, which is a podcast you’re listening to, is produced by Courtney Bergsieker. Ellen Rolfes writes our newsletter. Today’s program is engineered by Drew Jostad. Mixing by Juan Carlos Torrado. Our intern is Thalia Menchaca.

Kimberly Adams 

Ben Holliday and Daniel Ramirez composed our theme music. Our senior producer is Marissa Cabrera. Bridget Bodnar is the director of podcasts. Francesca Levy is the executive director of Digital. And Marketplace’s Vice President and General Manager is Neal Scarbrough.

Kai Ryssdal 

There we go. Another day. Another podcast.