What People Miss About the Trade Deficit
A lot of people are worried about the US trade deficit recently. The US sends billions of dollars abroad every year to import foreign goods. Intuitively this seems bad. But it also is only looking at half the ledger.
Buying and selling goods is not the only way that money flows across borders. We also need to look at buying and selling productive assets. In other words, investment. As an investor, I know just how critical it is to look at both sides of the ledger before drawing conclusions.
In 2015, the US spent $500 billion more on imports than we earned on exports. But we didn’t just drain half a trillion dollars out of the country. Most of those dollars came back to America as investment capital. In fact, that trade deficit was almost totally offset by a net inflow of $440 billion dollars of investments. That $60 billion net outflow is only 0.3% of our $18 trillion economy.
Regardless of your political views or which macroeconomic theory you subscribe to, I’m sure we can all agree that the $440 billion in investments is an important number that seems to get less attention, and that means people aren’t looking at both sides of the ledger before drawing conclusions.
Whenever we examine a financial relationship, it’s always important that we look at the whole picture. A company that is taking on a lot of debt might look like it’s in trouble, but a wise investor will ask, what are they doing with their borrowed cash? If the company has a great opportunity, then that debt might be a sign of financial acumen. The opposite can be true too. Sometimes a company will begin paying out great dividends to their investors, but investors still need to ask, where is that money coming from? Maybe the business is performing well, but maybe they’re just raiding their assets and cannibalizing their future. Without proper context, facts can be misleading.
When it comes to foreign trade, the US might have a persistent deficit, but we also have a long term investment surplus. For investors, the US is still king of the world, and that’s a valuable positive sign. When our trading partners put their capital in America, it’s an expression of confidence in our future. They think the US offers the best combination of stability and growth. And, crucially, it gives them a stake in our continued success.
