Trade Deficits Are Not All Bad

This seems like a good time to talk about trade deficits. The notion that U.S. trade deficits are inherently bad is simply not true. Opposing trade deficits on the campaign trail makes for good politics, but that just shows how little most of us know about the topic. First of all, a trade deficit is not a deficit in the way most people think. A budget deficit is a real deficit, and we all understand the obligation of a government needing to pay back borrowed money. A trade deficit, however, has nothing to do with borrowing money or incurring an obligation. If we buy medical equipment from China and pay them $1 million U.S. dollars, we just increased the trade deficit. We don't owe the Chinese company more money -- the bill has been paid and there is no further obligation. Wait you may say, when the Chinese company is now holding that $1 million U.S. dollars, don't they have a claim on U.S. goods and services? The answer is no. Those dollars are assets, which fluctuate in value like any other asset. There is no obligation involved.Now, if China takes those U.S. dollar assets and buys U.S. Treasury securities, then we can say they have a claim on our government to be repaid the money lent with interest. However, that is part of the U.S. budget deficit, not the trade deficit. The amount of money the U.S. government wants to borrow is a U.S. political decision. It's not China's fault our U.S. budget deficit is so big, and it has nothing to do with U.S. customers paying a Chinese company for medical equipment.The next point about the trade deficit is that most people see it as a two-variable equation. Imports minus exports is how we compute the trade balance, and when U.S. imports exceed U.S. exports we have a trade deficit.What doesn't get mentioned, however, is that the reputation of the currency of exchange is also part of the equation. The number one reason we have to go back to the recession of 1981-82 to find a U.S. trade surplus is because the U.S. economy has largely been a safe haven for investors' funds. When foreigners trade with the U.S. and hold on to some of the U.S. dollars they received, they do so because they have confidence in the value of the U.S. dollar and the economy behind it. That is not a bad thing.