The international trade deficit may seem somewhat remote and academic, but it is a very real economic situation. The US is now a net international debtor to the tune of about 6.5% of US GDP. At some point this will have to correct, meaning the US will have to become a net international creditor again. There have been various arguments put forward by the Right Wing Noise Machine (RWNM) arguing the deficit is no bid deal, or that we should not be concerned about it, or that times have changed and this is a new reality. Below I will outline these arguments and explain why they are wrong
The Global Savings Glut
This was proposed by Fed Chairman Bernanke in a speech titled The Global Savings Glut and US Current Account Deficit. Bernanke argues there is an excess of savings in the world. This excess of savings is driving down interest rates and providing financing for the US trade deficit. Interestingly, emerging economies are providing the excess savings rather than the industrial world. This is occurring as the result of financial shocks to the developing economies during the 1990s, which caused various developing countries to develop excess savings.
International Monetary Fund economist Raghuram Rajan noted this excess savings is less the result of an increase of savings rather than a decrease in investment:
Investment has fallen off sharply since [the international financial crisis's of the 1990s], with only very cautious recovery. [See Chart 1] This is particularly true of emerging Asia and Japan.
Global investment dropped from 23% of World GDP in 2001 to 21% in 2003 and is currently on an upward trend. As global investment increases, the amount of savings bound for the US will decrease.
In addition, Bernanke makes several interesting observations about the use of the incoming savings:
A third concern with the pattern of capital flows arises from the indirect effects of those flows on the sectoral composition of the economies that receive them. In the United States, for example, the growth in export-oriented sectors such as manufacturing has been restrained by the U.S. trade imbalance (although the recent decline in the dollar has alleviated that pressure somewhat), while sectors producing nontraded goods and services, such as home construction, have grown rapidly. To repay foreign creditors, as it must someday, the United States will need large and healthy export industries. The relative shrinkage in those industries in the presence of current account deficits--a shrinkage that may well have to be reversed in the future--imposes real costs of adjustment on firms and workers in those industries.
According to the Organization for Economic Cooperation and Development, the US invested 7.4% of GDP in machinery in 1999 and 6% in 2004. The US invested 4.6% of GDP in housing in 1999 and 5.8% in 2004. In other words, the use of funds shifted from export producing assets to non-export producing assets. As Bernanke notes, this hinders the US's ability to export its way out of the trade deficit.
The global savings glut theory is less of situation with excess savings and more an issue with decreased international investment. When investment returns to average levels, the excess savings will disappear.
The New Economy
This argument states because the US is such an attractive place to invest, it will continue to benefit from excess foreign inflows. Proponents of this view cite the US' political stability, sophistication of US financial markets and its solid growth rate as prime reasons for this attractiveness.
First, this view is correct. The US is a strong economy. But it is far from the only attractive area to invest. For example, China and India have grown faster than the US in GDP every year since 1992. Korea has grown faster than the US for every year since 1999. Several smaller countries in Eastern Europe (Greece, Turkey and the Slavic Republics) have growth faster than the US for the last three years. Russia has growth faster than the US for the last 6 years. In short, the US is not the only growth story on the world stage. Granted, the US is still the most advanced financially (with the possible exception of Korea) making it perhaps more attractive, but the higher return offered in the other markets is also attractive for international investors.
Secondly, this argument assumes the US will continue to be an attractive place so long as growth remains strong. For example, in an article titled US deficit: it's not only sustainable, it's logical Richard Cooper wrote:
Suppose, as is reasonable, the US economy has a trend rate of growth of 5 percent a year, three plus percent in real terms and 2 percent inflation or a little less.
At some point within the next 5 years, the US will experience a recession. There is no getting around that fact that all economies rise and fall. Given the Federal Reserve is raising rates, housing (the main engine of growth for this expansion) has record high levels of available inventory for new and existing homes, housing affordability is near historic lows, household debt is astronomically high, wage growth doesn't exist, the federal deficit will continue for a few more years and the trade deficit is historically high. One or a combination of these factors will cause the next recession. And when the country has a recession GDP drops as does the attractiveness of the US as a place to invest.
The basic flaw of the new economy theory is simple: it makes the assumption the present situation will continue into the future ad infinitum. This is simply not the case.
It's Their Fault Theory
An adjunct to the new economy theory is that other countries are somehow responsible. Treasury Secretary Snow put this idea forward at a recent meeting of the G8 where he essentially argued that other countries need to increase their level of domestic consumption to US levels. This will increase the market for US exports and therefore decrease the trade deficit.
This theory has several flaws. The first is pure hubris. The US is arguing that other countries adopt policies like the US'. Considering out mounting trade and budget deficit and lack of national savings, this might not be the most attractive.
The second is it won't work. The gap between US exports and imports was $617 billion in 2004 and $723 billion in 2005. Notice the gap is widening meaning US imports are growing faster than exports. Foreigners would have to radically alter their internal policies which so far they have been unwilling to do.
Conclusion
Both of the RWNM's trade deficit arguments have strong counter-arguments. The savings glut is just as likely caused by declined investment as excess savings. The new economy isn't; other markets exist with higher growth rates and the US can't continue growing forever (especially with its structural problems).
In short, both of these arguments appear to be PR mechanisms as much as theories. Imagine that for a Republican.