We use cookies (including third-party cookies such as Google) to remember your site preferences and to help us understand how visitors use our sites so we can improve them. To learn more, please see our privacy policy and our cookie policy.

To agree to our use of cookies, click 'Accept' or choose 'Options' to set your preferences by cookie type.

Options Accept
BullionVault

CHARTS

  • English
  • Deutsch
  • Español
  • Français
  • Italiano
  • Polski
  • 日本語
  • 简体中文
  • 繁體中文
  • Daily audit
  • Help
  • Contact
  • Deposit
  • Login
  • Open account
  • ABOUT US
    • About BullionVault
    • In the press
    • Reviews
    BUY/SELL BULLION
    • Vaulted gold & silver
    • -Live order board
    • -Daily Price
    • Coins for delivery (UK)
    INVESTMENT GUIDE
    • Guide to gold
    • -How to buy gold
    • -Gold investment
    • -Gold investment plan
    • -Investment insurance
    • -Compare asset performance
    • Guide to silver
    • -How to buy silver
    • Guide to platinum
    • -How to buy platinum
    GOLD NEWS
    • Gold news front page
    • -Gold price news
    • -Opinion & analysis
    • -Market fundamentals
    • -Gold/Silver Investor Index
    • -Infographics
    CHARTS
    • Gold price
    • Silver price
    • Platinum price
    • Price alerts
  • Login
  • Open account
  • BUY/SELL BULLION
  • Vaulted gold & silver
    • ⤷
    • Live order board
    • Daily Price
  • Coins for delivery (UK)
  • INVESTMENT GUIDE
  • Guide to gold
    • ⤷
    • How to buy gold
    • Gold investment
    • Gold investment plan
    • Investment insurance
    • Compare asset performance
  • Guide to silver
    • ⤷
    • How to buy silver
  • Guide to platinum
    • ⤷
    • How to buy platinum
  • GOLD NEWS
  • Gold news front page
    • ⤷
    • Gold price news
    • Opinion & analysis
    • Market fundamentals
    • Gold/Silver Investor Index
    • Infographics
  • CHARTS
  • Gold price
  • Silver price
  • Platinum price
  • Price alerts
  • ABOUT US
  • About BullionVault
  • In the press
  • Reviews
  • Help
  • Contact
  • Daily audit
    • English
    • Deutsch
    • Español
    • Français
    • Italiano
    • Polski
    • 日本語
    • 简体中文
    • 繁體中文

Gold News

Live support

NEED HELP? ASK US NOW

Search form

Gold News front page

Gold Price News

Gold Prices Fall with Real Interest Rates as US Fed Risks 'Taper Tantrum' and 'Inflation Freak Out' in Bonds

More...

Gold Investing In Depth

Learn about gold bullion bars

Learn about gold bullion coins (and costs)

Gold investment: Why & how?

Gold Investment Analysis

  • Latest Gold Investor Index
  • Diversification: Gold as investment insurance
  • 40-year Asset Performance Comparison Table

Gold Articles

Opinion & Analysis

Gold Price News

Investment News

Gold in History

Gold Books

Gold Investor Index

Gold Infographics

Archive

  • January 2021 (18)
  • December 2020 (24)
  • November 2020 (23)
  • October 2020 (25)
  • September 2020 (25)
More...

List of authors

Who Wants a Trade Surplus?

Wednesday, 8/02/2017 13:45

If it's you, then spend less, save more...

THERE is a lot of grumbling that free trade is eroding economic health in the US, writes Nathan Lewis of New World Economics in this article first posted at Forbes.

There is some merit to these arguments; also, the US economy hasn't been very healthy for a long time. Recently, there has been talk about new tariffs on steel. This has been supported by Wilber Ross, now US Secretary of Commerce, who, in 2002, assembled the International Steel Group from assets of several bankrupt steel companies.

In 2005, Ross sold ISG to India's Mittal Steel Company, for $4.5 billion. Media reports at the time estimated that this sale price was over twelve times Ross' investment. (The fact that president George W.Bush slapped new tariffs on steel, immediately after Ross' purchases, certainly helped.)

There are a lot of issues surrounding trade – for example, the tendency of trade agreements to come attached with globalist institutions that erode national sovereignty. The European Coal and Steel Community (1951) not only allowed trade in coal and steel, it introduced a whole new supranational government structure, including three branches of government and a parliamentary body, that later grew into the European Union. This sort of thing should be avoided with extreme prejudice.

Today's environment of floating fiat currencies introduces new problems. The devaluation of the Mexican Peso in 1995, shortly after the passage of the North American Free Trade Agreement in 1994, caused all sorts of hardship for US competitors that cannot be attributed to any meaningful "comparative advantage".

Nevertheless, we will try to isolate some of these sub-issues by asking: would free trade be acceptable if the United States ran a trade surplus?

A trade surplus would not help the US steel industry very much. Nor would it help any domestic manufacturers of the sort of thing you buy at WalMart. But, other US manufacturers (and service providers) would also be selling an equivalent, or greater, amount of goods and services to foreigners. This could be things like agricultural products, capital goods, software, and a wide variety of services including banking or information technology.

I think most people would feel that this is acceptable. The easiest way for us to acquire beach chairs is to sell complicated barcode scanning systems, and then take the beach chairs in trade. At present, gross exports of goods and services are about 80% of gross imports. The 20% difference is the "trade deficit".

Today, gross exports of goods and services are greater than at any time before 2007 – around 12% of GDP. We don't seem to have any trouble selling our wares to foreigners. We are selling more to foreigners than ever. In the 1960s, when the US had a trade surplus, total exports were about 5% of GDP. Imports, of course, were less than this.

If the amount we sell to foreigners has been steadily rising, why can't we manage to run a trade surplus? The reason has to do with the nature of trade, investment, and savings. Domestic capital creation – basically, the combination of the private savings rate and corporate profits – in the US is low. Much of this new capital is then dissipated on consumer lending, government budget deficits, and capital-related taxes. To fund new investment, capital must be imported. This appears as the trade deficit.

Thus, if we want to have a trade surplus, we should generate more capital domestically, and squander less, to finance domestic opportunities and leave some left for net foreign investment. This means more gross consumer saving and less consumer lending; plus, smaller government budget deficits.

Just as, on a personal level, "higher savings" means less purchasing of goods and services (relative to income), and more acquisition of real and financial assets, so too the analogous behavior, on an aggregate national level, would mean fewer imports and more net acquisition of foreign assets.

Sometimes people ask me: are trade balances driven "by the goods side," or "by the investment side"? Actually, they are intertwined. Let's take an example: What if the price of oil doubles? Since demand is slow to change, this would mean a big jump in the cost of oil imports. Certainly, that has nothing to do with domestic savings, right?

Let's imagine the US as one aggregate entity trading with the Rest of the World. If higher spending on oil imports is offset by less spending on other imports, leaving total spending (and the savings rate) unchanged, then we can see that total imports do not rise, and the trade deficit is unchanged. Alternately, if the US spends more on oil imports, but other imports do not change thus leading to higher total spending and higher total imports, the higher overall spending is effectively financed by a decrease in the savings rate, and the trade deficit would increase.

What about the other side? The Rest of the World gets more Dollars for its oil. What does the ROW do with these extra Dollars?

In the first instance, they probably appear as a bank balance in an account at a US bank – a financial asset. If these extra Dollars are then spent on goods and services, then US exports increase, the "trade deficit" does not change, and the ROW's savings rate is unchanged. However, if they are left as a bank asset, or used to acquire other assets such as Treasury bonds, then the ROW effectively "saves" the new income, US exports do not increase, and the "trade deficit" expands. We can see that decisions about savings and investment do indeed drive the trade account, even in this example.

We should not be too unhappy by the fact that foreigners invest in our economy – that the US runs a trade deficit. In the midst of low capital creation today, this finances investment and thus helps create jobs and prosperity that would not otherwise occur. It would be better if we could generate lots of capital internally, but in the absence of such a happy condition, capital imports probably allow a healthier economy than would otherwise be the case.

To put it a little more bluntly – what if foreigners were banned from all future purchases of Treasury bonds? The trade deficit might shrink, but you can imagine some of the other consequences.

If we had big pro-business reforms in the US, like a 15% corporate tax and other such advantages, then the US would be a better place to invest. How would the US steel industry be doing if it had low taxes and efficient regulation (effective but not burdensome) regarding environmental issues, worker safety, healthcare, legal liability, or a dozen other things handicapping the industry today?

This kind of business-friendly environment could lead to new investment in steel, and could thus drive an even larger "trade deficit", as domestic capital is insufficient to finance all the available opportunities. This was the case during most of the nineteenth century, as European capital flowed to the US, some of it financing the original growth of America's steel giants. During the 1990s, high-growth Asian economies like Korea and Thailand had high savings rates and capital creation, but so many domestic opportunities that they still imported capital and ran a "trade deficit."

Whenever I look into issues surrounding trade, I come to the conclusion that most concerns would be resolved by a combination of a business-friendly environment, Stable Money, and high levels of capital creation. In other words, the Magic Formula: Low Taxes and Stable Money.

There are still some issues regarding "globalism" that merit attention, but I think that most people would be happy with the overall result.
 

  • Reddit logo
  • Facebook logo
  • Twitter logo
  • Google logo
  • Yahoo logo
  • LinkedIn logo
  • Digg logo
  • StumbleUpon logo
  • Technorati logo

Formerly a chief economist providing advice to institutional investors, Nathan Lewis now runs a private investing partnership in New York state. Published in the Financial Times, Asian Wall Street Journal, Huffington Post, Daily Yomiuri, The Daily Reckoning, Pravda, Forbes magazine, and by Dow Jones Newswires, he is also the author – with Addison Wiggin – of Gold: The Once and Future Money (John Wiley & Sons, 2007), as well as the essays and thoughts at New World Economics.

See the full archive of Nathan Lewis articles.
 

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

Follow Us

Facebook Youtube Twitter LinkedIn

 

Mobile apps

 - live trading 24/7

 - buy & sell instantly

 - up-to-the-second charts

 

 

 

Daily news email
Go to 'communications settings' 

Get the latest daily gold price news free by email

Latest gold news by email

 

 

 

Gold Investor Index
5 January 2020

Gold Investor Index

Gold investing +58% in NY21

 

 

 

LBMA webinar
21 January 2021

LBMA

London gold trading

 

 

 

International
Investment

16 December 2020

Gold 2021

Gold in 2021

 

 

 

LBMA Alchemist
1 December 2020

Newton

True Gold/Silver Ratio

 

 

 

  •  Email us

Market Fundamentals

  • 'Cut Bullion Duty to Cut Smuggling': India's Gold Industry
  • Platinum Price Hits 4-Year High Even as Electric Beats Diesel Cars in Europe
  • Record Investing Pushes 'Industrial' Silver and Platinum into Deep Deficits
More...
  • Cost calculator
  • Cookies
  • Terms & conditions

©BullionVault Ltd 2005-

  • Twitter
  • Facebook
  • LinkedIn
  • YouTube

Save your cookie preferences

We use cookies to remember your site preferences, record your referrer and improve the performance of our site. For more information, see our cookie policy.

Please select an option below and 'Save' your preferences.

Save

You can update your cookie preferences at any time from the 'Cookies' link in the footer.

Secure auto-logout warning

You have not been active for some time.

For your security you will be logged out in   minutes unless you take action.