Why America can run trade deficits forever
By Scott Sumner
Here’s the Financial Times:
China’s provision of development finance to the emerging world has always been about much more than building infrastructure to reap a commercial return. It has also been about changing destinies. Beijing selected countries that it aimed to lift from poverty, while forging political alliances and creating markets for Chinese goods. The defining characteristic of China’s power projection is its ability to get things done.
Thus, a mounting economic crisis in Venezuela comes as a big blow. Caracas is the biggest client of China’s state-orchestrated development lending, accepting some $65bn in loans since 2007 for projects such as oil refineries, gold mines and railways. But in May this year, Venezuela engineered a default under which it has deferred paying the principal — and only honours the interest — on outstanding debts estimated at $20bn-$24bn.
Worse may be yet to come. Venezuelan inflation is running at about 800 per cent and a chronic shortage of US dollars is preventing Caracas from paying some of the contractors that keep its oil supplies flowing. Since China’s loans are secured against this dwindling output of oil, pulses are racing in Beijing. In addition, some of the projects undertaken with Chinese money, including a partly built high-speed railway, have been vandalised and abandoned.
The US has been running large current account deficits for many decades. Commenters often suggest that this means we are becoming a debtor nation, living beyond our means. This is not true.
The US earns more from our foreign investments overseas that foreigners earn on their investments in the US. China earns $65 billion selling goods to the US, and fritters the money away in loans to places like Venezuela. Meanwhile our multinational corporations make shrewd investments overseas, which bring lots of money back to the US economy.
The international accounts balance out perfectly, once you include trade in goods, services, and assets. The overall balance of payments deficit is precisely zero, if measured properly. Some countries, such as China, are relatively good at exporting goods. They run a positive trade balance. The US is relatively good at international investment—we run a persistent trade deficit, financed by our profits on overseas investments. Or we sell the Chinese “goods” such as houses in LA, that don’t count as US exports because they are not physically moved overseas.
Our balance of payments accounting doesn’t really correspond to what’s going on in the real world. If we sold the Chinese mobile homes, and put them on a ship to China, they’d count as exports. It sounds crazy, and it is, but that’s how the accounting is done.
This does not mean that we live beyond our means. GDP in the US is much larger than US consumption. Over time, we are becoming wealthier and wealthier. If countries like China ever became more adept at international investment, then the US would have to share a greater proportion of its GDP with the rest of the world.
Most importantly, the current trade balance is not “unsustainable”, and there need not ever be a “day of reckoning.” Some bloggers obsess over international “imbalances”—ignore them. Countries with large current account deficits may have debt problems (i.e. Greece in the early 2000s) but the problem is not the CA deficit per se, it’s the excessive debt.