Is a Trade Deficit Actually a Sign of Power?
Last week the United States Census Bureau released 2018 trade deficit numbers causing the prominent headlines last week. Trade deficits are nothing new. The media loves the opportunity to highlight failures in the Trump administration‘s fight to reduce the amount of trade differential between the U.S. and China. There is great debate over the pros and cons of trade deficits, with the majority of economist showing very little concerned over them. Nevertheless, they are headline grabbing and resulted in a few questions I received last week. So, I’ll give you the 101 on trade deficits, call it my thoughts.
A trade deficit is nothing more than the difference between our total exports and out total imports. Last week’s release of the December figures top 50 billion produce to seasonally adjusted number of 878 Billion for 2018, a record number.
My take on the situation is trade deficits are a result of market forces. We as consumers will always look to get the best value for a dollar. It’s the way it has been, and it’s the way it always will be. If there is a better product that is cheaper then that’s the direction that we will go. I feel that trade deficit is a result of developed markets liberating growing economies or emerging markets.
When you are the richest country in the world hungry to consume, in the day of two-day purchases, the market forces will continue to give you options from all over the world. Emerging markets such as China will be able to produce goods at a much cheaper rate due to labor being cheaper and a far less stringent quality control mechanism and regulation landscape. As their economy develops, wage pressures will put the squeeze on margins and ultimately prices will increase. As such the products that were once relatively cheap will have to compete on the same playing field as developed economies. This is how business operates over the long-term. Cycles happen. The stronger a country is, the greater its trade deficit (with the exception of countries with natural resources). The U.S. economy is over 20 Trillion and the deficit was around 4% of that which is around our long-term growth rate. Sometimes perspective matters when we talk about large numbers.
There’s another argument out there that states that the amount of deficit the U.S. has each year to other countries matches the amount of foreign investments made in the U.S. Therefore, it could be argued that any policy changes that are made to reduce the deficit will have an unintended consequence of reducing foreign investment.
Why wouldn’t foreign investors want to invest in the U.S. through corporations, bank deposits, real estate and U.S. treasuries? Since the financial crisis, (which was bad but worse in emerging economies) the U.S. has been a great place for capital growth in stock markets and real estate. Our banks are some of the safest in the world and U.S. debt is still considered the safest risk on the planet.
The U.S. wants foreign investment. Capital goes to the companies and economies that provide economic growth opportunities. A focus on policies that spur growth I believe is a more productive use of our political capital.
How does all of this equate to our investments? Another headline that can drive the market short term and is ultimately in my opinion will not have a long impact on capital markets. In the meantime, it can sell some newspapers.
With that here’s the Buy/Sell.
Source: MG&A
As always please feel free to call with any questions.
