Wired for Politics

To many Americans, global free trade is a good thing.  We get to buy more things at cheap prices, and the world pays for us to do this by investing in America.  Despite its current weakness, the U.S. Dollar is THE global resurve currency, which allows us to export much of the dollar’s inflation to other developing nations (see China & Saudi Arabia) while we enjoy the benefits of more consumption.  However, something I know most Americans don’t believe is a good thing is our huge trade deficit.  Investor’s Business Daily has a piece out this week about what trade deficits tell us about an economy in the global marketplace.

Last year, for instance, we rang up a record $708.5 billion deficit for both goods and services. But we imported the equivalent of $738.6 billion in investment capital to offset that. This was used to buy Treasury notes, bonds and stocks, and to fund real estate, plants, equipment and worker training.

Looks like we got a good deal there.

So what does it say that our deficit is now shrinking?

On the whole, it means foreign investors find the U.S. economy a less inviting place to be, maybe because of the housing meltdown and concern over the upcoming election. But if the trend continues, it means we’re all going to have to consume less and save more to make up for the decline in foreign capital.

That might not be a bad thing, but don’t let anyone tell you it will be painless. In the short run, a falling trade deficit will boost GDP. Indeed, based on Friday’s data, it’s likely first-quarter GDP growth will be revised up from the first estimate of 0.6% to roughly 1.2%.

But in the long term, having less foreign investment means our economy will grow more slowly. That’s the downside.

Don’t believe it? Just look at Germany and Japan. They’ve run huge trade surpluses for years, yet their economies have grown slowly at best since at least 1990. They export lots of their capital, as all trade surplus nations do, so they have less to grow on. We import it — and grow faster.

I know that for years the only thing that Republicans and Democrats have been saying is that we need to ‘reduce’ the trade deficit, almost at all costs.  From restricting imports, renegotating trade deals (which one would assume would put new constraints on us and our partners) and out right protecting many sectors of our economy (mainly ones with unions).

I know I’ve often wondered why Germany and Japan haven’t grown faster and more robustly in the last two decades with the hugh trade surpluses they have.  One thing I do know about their economies, is that that they have very restrictive import regulations.  General Motors and Ford don’t have near the market access in Japan and Germany as BMW and Toyota do in America.  Again, this would corroborate with the above statements.  By restricting imports, they are also restricting investment in their countries, thus slowing overall growth.  I do think that the U.S. needs to fight for more openness with our trading partners (mainly China, India and Japan), but what we don’t need is to focus only on the deficit numbers and enact policies that will lower the deficit, but also hurt growth.