Long Live the Trade Imbalance

Do you worry about the US foreign trade imbalance, the current account deficit and foreign debt? Well, stop it! The US economy is just fine and all those “negatives” are nonsense.

Yesterday I wrote that the trade deficit with China ($162B in 2004) is actually a win-win transaction that is a boon to the US economy. In an LA Times article today (“A Deceptive Deficit”) James Flanigan explains that Chinese manufacturing actually makes only 20% of the value of the goods they export to the US. The remaining 80% goes to US firms such as GM, Motorola, Wal-Mart and Home Depot. Not a bad deal for the US!

But we hear about the threat of foreign investors buying up America. What if they decide to sell and send our economy into a funk? The numbers do seem troubling.

Economists keep track of the net international investment position (NIIP), the value of foreign assets owned by US citizens minus the value of US assets owned by foreigners. It seems like a healthy positive NIIP would be nice. That was the case until 1989, but since then the NIIP has gone into negative territory, reaching minus $2.6Trillion in 2004. The US is now a debtor nation.

Another measure is the amount of US securities owned by foreigners. The total US securities at the start of 2004 amounted to $33.4Trillion, about 50% of the whole world total. (America… What a country!) Foreign investors held $5.4Trillion or 16% and the amount has been increasing since. This surely sounds ominous.

But the truth is that “the world’s appetite for US assets bolsters US predominance rather than undermines it.” (David Levey and Stuart Brown, “The Overstretch Myth,” in Foreign Affairs, March 2005)

Think about it. If you were a foreign investor, where better to put your money than into the US economy with “its openness, its low regulatory burden, its flexible labor and capital markets, a positive environment for new business formation, and a safe financial market that supports new technology and innovation.” With the US economy projected to continue growing faster than Europe and Japan for several more decades, it makes good sense for investors to continue flocking to the US markets.

Thus the trade imbalance, the current account deficit and ballooning foreign debt are good things, signs that America’s economic superiority and financial stability will not decline soon. There is “only one development could upset this optimistic prognosis: an end to the technological dynamism, openness to trade, and flexibility that have powered the U.S. economy.”

Technology development and innovation rely on a supply of top flight scientists and engineers and financial support of entrepreneurs. The US has an abundance of entrepreneurial types and the only capital market capable of financing large numbers of new start companies. The supply of technical talent is my only worry; more on that later.