Why Does the U.S. Always Run a Trade Deficit?

The US is manufacturing more than ever and is the second largest manufacturer in the world after China. The US middle class has actually "eroded" upwards -- our wealthiest population cohort has tripled in the last thirty years.

No. The US will win the next world war by replying on its advanced capabilities in restaurant work and business consulting.

> weakened national security manufacturing capacity,

What products specifically would be a national security concern? The CHIPS act was passed to revitalize semiconductor manufacturing because we rely heavily on Taiwan. From my understanding, we already have a lot of domestic manufacturers for various parts, who are too expensive for the average American but are the main suppliers to the DoD.

>There's the risk of this system stop working and that's when the US might have hard times due to being forced to live by its means and have no ability to kickstart its own production when that time comes.

I think the risk is greater than that. A concern is not just a regression to the mean, but indebtedness and the future having to pay up for the spending of the past.

I think a different analogy would be a joint credit card where someone can run up the bill and then die. Like national debt, you can always default, but it will be the survivor that takes the hit, not the dead person that spent their life in luxury.

The trade deficit isn't necessarily a problem, but national debt is. It would be one thing if this money was being invested in growth, but it largely isn't. Most of it funds non-growth consumption.

This is largely a self-made internal problem around governmental prioritization and balancing revenue with expenditure. That isn't to say other countries don't also benefit.

The US is trading future prosperity for consumption today. Investing countries are trading consumption today for future prosperity.

> China for example, sends huge number of electronics and all kind of other consumer goods that Chinese produce by sweating in 12 hours shifts in 6 day work weeks in exchange for imaginary numbers

That's more a function of subsidizes instead of foreign preference for USD.

Chinese median household incomes (Yuan 34,000 or around $4,700) are much too low to spend on most goods at scale [0], and most of the money that could be spent on expanding the social safety net (and thus incentivizing Chinese consumers to spend instead of save) is spent on industrial subsidizes like tax holidays, a regressive income tax system comparable to the US, and subsidizing various redundant but provincially influential SOEs that can't compete with domestic private sector players (eg. traditional Chinese automotive players like SAIC and Chery versus BYD), and this is reflected in Chinese spending data as well as StatsChina's breakdown of spending by urban and rural Chinese [0].

You are going to be dependent on foreign exports if your domestic consumers can only spend around Yuan 4000/$550 a year on transportation and telecom combined. Even factoring for PPP, it is difficult as these metrics are low in comparison to peer countries from a developmental standpoint.

A lot of the "overproduction" that has made Chinese goods globally dominant is a result of that misalignment between consumers and production.

Expanding the social safety net in China would dramatically enhance Chinese competitiveness over the long term, but top level leadership remains explicitly opposed to what they call "Welfarism" [1]:

"福利主义典范国家，中产塌陷、贫富分化、社会撕裂、民粹喧嚣，这不乏警示— 防止落入“福利主义”养懒汉陷阱"

"In countries that use a welfare model, the middle class is collapsing, the rich and the poor are polarizing, society is torn apart, and populism is rising. This is a warning - Prevent yourself from falling into the trap of "welfarism" to support lazy people"

[0] - https://www.stats.gov.cn/english/PressRelease/202501/t202501...

[1] - http://theory.people.com.cn/n1/2021/1116/c40531-32283350.htm...

Even more sad that the US chose NOT to invest this surplus, for instance in infrastructure, education and a sensible health system.

It's useful as a political tool, that's about it.

Up until now it was a fairly harmless political distortion. I suspect in the past we maybe had some executives who themselves bought into it but they took input from folks more educated on the matter and just let sleeping dogs lie.

But now we have an administration who at least seems to believe it whole heatedly and isn't interested in anyone who is educated on the subject providing input.

The American obsession has to do with its value as a political weapon against the minds of dummies (with votes)

> Also, the often-mentioned US-EU trade deficit is not that big if you count in services. Which I think should be done in the 21st century. Large parts of the US economy are focused on digital high-value services, and they are "exported" worldwide.

This is why, in case of reciprocal tarriffs on physical goods, the US ends up the big winner - they don't apply to digital services, which are a huge part of US exports.

Now the world had slowly been catching onto this fact that they'd been getting absolutely rinsed by the FAANGs who have gotten their populace addicted to their opium and made trillions off of them without contributing anything meaningful back. For the first time, we were seeing digital services taxes - a decade overdue. Brazil now has one in place - great on them. The EU was also planning one, but then the tarriffs came, and suddenly voices are saying they might abandon it. If the current US gov was any other US gov, the obvious conclusion would be that they're using tarriffs as a pawn to prevent the rise of digital service taxes.

Obviously, in the current timeline this wasn't the main reason. But there's no way Mark, Satya, Jeff and Tim haven't been whispering into big leader's ear just how "unfair" these DSTs are.

In fact, according to US government published numbers, the US runs a goods+services surplus with quite a few countries.

FWIW, I’m not sure I believe the official numbers, or at least I don’t believe that they measure anything useful. When a French customer buys an AMD CPU or Nvidia GPU that was made in Taiwan, the physical object may never touch US soil, but a lot of money flows in. Did we export a good, a service, or neither?

What about when a Spanish user sees an ad funded by a German company and four different US intermediaries are involved in showing that ad? What if the US companies play complex accounting tricks to redirect the income to a subsidiary in a low-tax jurisdiction like Ireland and then effectively materialize some of the dollars in the US by buying shares in the parent company’s stock but mostly just let the nominally Irish dollars sit in US accounts and let US people own very valuable stock?

(Interestingly, IMO none of this requires that USD be a reserve currency. One could easily imagine the same type of economy where gold earned in Europe in deposited in a vault in the US, held by an account that is nominally Irish, and used as investment collateral for various US or foreign investments denominated in XAU. Or it could be cryptocurrency or pretty beads or whatever.)

The average American conflates trade deficits with the loss of domestic industries/jobs.

The obsession has at least one interesting question attached: ownership of real property. At the limit, at least, that becomes a genuinely interesting question.

yes indeed - it has been conflated with the decline of US manufacturing. Reality is the most significant export of the US is the USD itself - that is the trade good which everyone must have (at US insistence)

There wasn't an obsession. Trump just weaponized the word deficit to justify tarrifs. Anyone with an IQ over 100 and two minutes to listen to an explainer video on this would quickly understand the con.

You are correct and the original poster is wrong in this specific regard.

Infact one of the most interesting/scary incidents for the US dollar was China selling USD denominated bonds and getting almost the same rate as the US government gets, which essentially means China can compete for USD with US government.

The implications of this is that if CHina wants, they now have another level to compete with the US. They can now issue USD denominated debt along the yield curve in areas where it would hurt the US hte most.

In the short term that is the frond end of the yield curve(short term under a year) where the US has to roll about $8 Trillion in debt over the next year.

With China competing by offering bonds here they will force up the interest rate the US has to pay pushing yields up with is the exact opposite of what Trump has publicly stated that he wants and making the US's already large fiscal deficit an even larger problem.

Correct.

You can open up an USD account in maybe Zambia and transfer funds to another USD account in Dubai without it ever touching the US financial system.

There were no free floating currencies back in the 1960s nor open capital markets as we understand them today. Cannot really compare the two eras.

Nixon broke Bretton Woods by coming off the gold standard, leading to massive expansion of the money supply. Lyn Alden has good analysis of this process https://www.lynalden.com/fraying-petrodollar-system/

Remnants of the massive industrial effort of WW2 plus China/Japan had not entered the chat yet.

Only if you have a single supplier.

For imports to be useful you need multiple suppliers all of whom have to have capacity to expand if one of the supplier lets you down.

Same as in business.

Industrial policy should decide domestic vs external production on that basis.

As the world moves to trade blocs the case for trade between trade blocs falls - precisely because the risk of getting left high and dry increases

Yes. Too much of a good thing, or a good thing at the wrong place or instant of time, ends up not being a good thing.

I would recommend against having sex in a subway station at rush hour, or drinking French Cognac during a job interview, although both are good things.

We can and should discuss how much trade deficit, and the nature of it, but in essence, it is still a good thing if you don't owe to other countries money in a currency you don't control to have this deficit.

Control trumps access trumps ownership. If the asset is on US soil under US regulations it's controlled by the outputs of the US political system. Any failure of those assets to actually benefit the local population is a failure of the US political system.

In a simplified sense, all assets start their lives as goods, either tradable goods, goods that are used to build more goods, future goods, or things that represent ownership or an interest in any of them.

Land is a bit more complicated. But even land value is conditional in what you can use it for.

> Keep in mind that what the fed article is calling a “saving gap” is really more of a fiscal gap that been plugged by US Treasuries.

They're two sides of the same coin, but the levers of control and causality aren't symmetric.

In particular, the US government doesn't have direct control over the savings behaviour of anybody, especially not of people outside the US.

That's why most policies that aim to reduce the US government deficit are bound to either fail or have undesirable negative effect elsewhere.

More precisely it’s because the EU has no fiscal unified fiscal policy. Every member is a currency user of a foreign currency it must acquire from the ECB.

Wynne Godley explained this all nicely in Maastricht and All That.

Or we would have automated assembly faster—the investment in which would’ve been counted in domestic investment offsetting the trade deficit, right? I’m trying to verify my mental model of what’s going on.

Maybe the military could just start forcing people to buy all US made products instead of just our currency?

Higher end Motorolas were mfg in the US in the early 2000s. It’s possible. Top of the line were ~$700, with inflation that’d afford iPhones. They were top sellers and not niche models.

iPhones are already heavily overpiced considering how other companies regularly release phones with similar specs at lower prices.

"If iphones were charged with US labor costs then nobody would buy them"

idk, people pay premium for avocado sandwich

a lof of cali folks certainly would do that

See answer above - the EU is less "debt-fueled".

But I also think that EU producers are more competitive. The US has a strong tendency towards local monopolies which are bad for export competitiveness.