U.S. Trade Deficit – Why it’s Not Always a Bad Thing – DTN

Grain storage. ©Debra L Ferguson

Once again I find myself putting together a column on the evening before significant news is expected, and as expected, the U.S. did increase tariffs on China by $34 billion early Friday, and China did respond with a $34 billion list of their own, including a 25% tariff against U.S. soybeans.  

China’s soybean tariff was originally proposed on April 4, so we can’t say we weren’t warned. You may also recall how we talked about the possibility of a U.S. trade dispute hurting soybean trade back in December 2016, not long after President Trump was elected. Even so, there hasn’t been much done to slow the trade-war train that jumped to a higher level on Friday. President Trump currently sounds willing to impose tariffs on all of China’s exports, if needed. Before Friday, November soybeans were trading at their lowest November prices in over two years.

While our attention is on Friday’s events, not yet knowing what else might follow, this seems like a good time to talk about trade deficits. The notion that U.S. trade deficits are inherently bad is simply not true. Opposing trade deficits on the campaign trail makes for good politics, but that just shows how little most of us know about the topic.

First of all, a trade deficit is not a deficit in the way most people think. A budget deficit is a real deficit, and we all understand the obligation of a government needing to pay back borrowed money.

A trade deficit, however, has nothing to do with borrowing money or incurring an obligation. If we buy medical equipment from China and pay them $1 million U.S. dollars, we just increased the trade deficit. We don’t owe the Chinese company more money — the bill has been paid and there is no further obligation.

Wait you may say, when the Chinese company is now holding that $1 million U.S. dollars, don’t they have a claim on U.S. goods and services? The answer is no. Those dollars are assets, which fluctuate in value like any other asset. There is no obligation involved.

Now, if China takes those U.S. dollar assets and buys U.S. Treasury securities, then we can say they have a claim on our government to be repaid the money lent with interest. However, that is part of the U.S. budget deficit, not the trade deficit. The amount of money the U.S. government wants to borrow is a U.S. political decision. It’s not China’s fault our U.S. budget deficit is so big, and it has nothing to do with U.S. customers paying a Chinese company for medical equipment.

The next point about the trade deficit is that most people see it as a two-variable equation. Imports minus exports is how we compute the trade balance, and when U.S. imports exceed U.S. exports we have a trade deficit.

What doesn’t get mentioned, however, is that the reputation of the currency of exchange is also part of the equation. The number one reason we have to go back to the recession of 1981-82 to find a U.S. trade surplus is because the U.S. economy has largely been a safe haven for investors’ funds. When foreigners trade with the U.S. and hold on to some of the U.S. dollars they received, they do so because they have confidence in the value of the U.S. dollar and the economy behind it. That is not a bad thing.

When foreigners like China buy U.S. Treasury securities with those U.S. dollars, it makes U.S. interest rates lower than they would otherwise be. For many in ag that depend on borrowed funds, having lower interest rates is also not a bad thing.

We could discuss more misunderstandings on this topic, but I hope by now you are starting to see a larger appreciation for what the trade deficit entails. There are legitimate reasons for getting tougher with countries like China that wrongfully take advantage of intellectual property rights. There are good reasons to negotiate fair trade policies for U.S. interests. But please, can we stop pretending that trade deficits are harmful and need fixing? In most cases, they don’t.

Stay tuned to DTN coverage on Friday as DTN Farm Business Editor Katie Dehlinger is prepared to keep us up to date with the latest news on the changing trade front.

Todd Hultman can be reached at Todd.Hultman@dtn.com

Follow him on Twitter @ToddHultman

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