04/05/2017

US Trade Deficit Down - Sadly, This Means Less Foreign Investment In The US

Tim Worstall, Forbes.com

We all think it's just a great idea when foreigners send their hard earned capital to be invested in the United States. This increases the capital stock in America. Things get built, factories opened, Americans get employed making and doing things. It makes the country richer and we all like that. Sadly, because the balance of payments does balance, always and everywhere, foreigners sending their capital in must also, and does, mean America runs a trade deficit. So, when the trade deficit falls what happens?

The U.S. trade deficit fell more than expected in February as exports increased to a two-year high and slowing domestic demand weighed on imports.

The narrowing in the trade gap comes as the Trump administration is pushing ahead with its agenda for fair trade and bringing back manufacturing jobs to the United States as it seeks to boost economic growth.

It's not quite and exactly true that a foreign investment surplus must mean a trade deficit. It's actually that a capital account surplus must mean a current account deficit and vice versa. But then it's also true that the investment balance is near all of the capital account and the trade balance is by far the bulk of the current account. So while not exactly true it's close enough that we need to take note of it:

As the gap shrank in February, global growth prospects were improving, giving U.S. exporters a boost. Exports of goods and services reached the highest level since the end of 2014. The narrowing of the deficit may mean trade will be less of a drag on growth in the first quarter. Fading in dollar strength and a pickup in manufacturing sentiment could be a further boon to trade in the months ahead.

Imports declined in February by the most in nearly a year as demand for consumer goods and automobiles waned.

Sigh, no a trade deficit is not a drag on growth. That's to confuse accounting identities with causality. But look at that again. The trade deficit closed because foreign countries are growing nicely and sucking in American imports. The American economy is growing more slowly meaning Americans desire fewer imports. People generally say that the trade deficit is a bad thing. But here it is shrinking because foreign economies are growing faster than the American. That's a good thing is it? What's causing the trade deficit to shrink?

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