Why is a trade imbalance bad?

[her209]

More US dollars are leaving the US and ending up in Chinese hands. Doesn't this mean money is leaving our "total pool of money" and therefore, the total amount of money floating around is therefore less and thusly inflation won't be as high? In other words, if every had a twenty dollar bill in their pocket instead of ten, wouldn't that mean they would be willing to pay for $20 for the same item instead of half?

 

[fskimospy]

no. your example is saying that only money is leaving the country and so with less of it around deflation would occur. With a trade imbalance wealth is leaving the country. Long story short, replace dollars with any other commodity like cars, food, etc. and you will see why it is bad.

 

[her209]

Originally posted by: eskimospy
no. your example is saying that only money is leaving the country and so with less of it around deflation would occur. With a trade imbalance wealth is leaving the country. Long story short, replace dollars with any other commodity like cars, food, etc. and you will see why it is bad.

Huh? I thought we (Americans) were buying more Chinese goods than the Chinese buying American goods.

 

[theeedude]

The Chinese lend that money back to us to buy their junk.
Trade imbalance is both good and bad. It's good if you like buying Chinese junk at Walmart. It's bad if you would like to make your own junk to sell at Walmart, because now you can't compete.

 

[Stunt]

Lower inflation would work if you were sending the money over in US dollars, but the producers in China sell using the yuan; therefore the currency is actually devalued through overseas purchases.

That being said, the yuan was pegged to the dollar so this would have little effect. The benefit to economically justified outsourcing is huge, but not for the reasons you state.

 

[bctbct]

Think of it like this.

GM is a country

Toyota is a country.

When one loses market share the other gains.

Who is the most stable country?

 

[ProfJohn]

We?ve had a trade deficit for 20+ years and our economy is still going strong.
Last time this topic came up I read an article on the net that pointed out that several countries with a trade surpluses also had poorly performing economies.

Check out what wikipedia has to say about all this
link

 

[her209]

Originally posted by: senseamp
The Chinese lend that money back to us to buy their junk.

You mean they buy our government bonds. But by doing so, they just take more money out of the economy when they are repaid.

Trade imbalance is both good and bad. It's good if you like buying Chinese junk at Walmart. It's bad if you would like to make your own junk to sell at Walmart, because now you can't compete.

You wouldn't be able to compete now. But as the prices for raw goods adjusts to the drop in demand, the goods become more affordable. Also, the costs of goods would grow slower than the same goods overseas due to the smaller money supply.

 

[charrison]

Originally posted by: ProfJohn
We?ve had a trade deficit for 20+ years and our economy is still going strong.
Last time this topic came up I read an article on the net that pointed out that several countries with a trade surpluses also had poorly performing economies.

Check out what wikipedia has to say about all this
link

And you will notice when our economy is a down turn our trade is more "in balance." Carefull for what you wish for.

 

[miketheidiot]

americans are chronic debtors, and very shortsighted in our finances.

 

[fskimospy]

No, no, no.

You can make the argument that trade imbalance is a symptom of rising demand here due to a well performing economy. You can also say that same economy will spur foreign investment and lead to more growth. In those ways a trade deficit can be viewed as a good thing.

In a completely practical sense though, wealth is leaving the country. That's what a trade deficit is. Are you trying to imply that america has too much money in circulation and that by having a deficit that would be decreased, and therefore the value of the dollar increased? If so, you do not understand basic economics. (admittedly I'm no expert either) What I said earlier about cars, goods, etc... I meant that you could substitute commodities for the dollars leaving the country, and that might more concretely illustrate the net effect of what is happening.

The trade imbalance has actually significantly threatened the stability and value of the dollar, and a significant number of economists are afraid that this continued imbalance will cause the dollar's collapse, with catastrophic results for the US and world economy.

 

[ProfJohn]

Originally posted by: eskimospy
No, no, no.

You can make the argument that trade imbalance is a symptom of rising demand here due to a well performing economy. You can also say that same economy will spur foreign investment and lead to more growth. In those ways a trade deficit can be viewed as a good thing.

In a completely practical sense though, wealth is leaving the country. That's what a trade deficit is. Are you trying to imply that america has too much money in circulation and that by having a deficit that would be decreased, and therefore the value of the dollar increased? If so, you do not understand basic economics. (admittedly I'm no expert either) What I said earlier about cars, goods, etc... I meant that you could substitute commodities for the dollars leaving the country, and that might more concretely illustrate the net effect of what is happening.

The trade imbalance has actually significantly threatened the stability and value of the dollar, and a significant number of economists are afraid that this continued imbalance will cause the dollar's collapse, with catastrophic results for the US and world economy.

We've had this impalance for 20+ years. How much longer till the dollar collapses and the world economy?

BTW: Did ya notice that during the last world economic slow down the US was the strongest economy in the world and lead the entire world out of the dumps with its strong growth?

 

[glutenberg]

Originally posted by: ProfJohn

Originally posted by: eskimospy
No, no, no.

You can make the argument that trade imbalance is a symptom of rising demand here due to a well performing economy. You can also say that same economy will spur foreign investment and lead to more growth. In those ways a trade deficit can be viewed as a good thing.

In a completely practical sense though, wealth is leaving the country. That's what a trade deficit is. Are you trying to imply that america has too much money in circulation and that by having a deficit that would be decreased, and therefore the value of the dollar increased? If so, you do not understand basic economics. (admittedly I'm no expert either) What I said earlier about cars, goods, etc... I meant that you could substitute commodities for the dollars leaving the country, and that might more concretely illustrate the net effect of what is happening.

The trade imbalance has actually significantly threatened the stability and value of the dollar, and a significant number of economists are afraid that this continued imbalance will cause the dollar's collapse, with catastrophic results for the US and world economy.

We've had this impalance for 20+ years. How much longer till the dollar collapses and the world economy?

BTW: Did ya notice that during the last world economic slow down the US was the strongest economy in the world and lead the entire world out of the dumps with its strong growth?

Nothing lasts forever, especially in the current economic climate.

 

[LunarRay]

Ask yourself first... What would be the difference between a product manufactured in the US and sold at Walmart versus one made in China and sold in Walmart?

Assuming we could make that product and deliver it to Walmart as say China can, where is the increase in wealth occurring?

Walmart sends dollars to China to pay for the product... versus Walmart sending the money to Chicago... Chicago must have employed some folks to make the product so maybe some additional products will be purchased in Chicago versus somewhere in China... That we buy and sell product to foreign nations is good.. but that we buy more than we sell indicates a few things...

One is that wealth is leaving the US... Another is that with that wealth leaving to China it is China that is developing its economy but it is geared to consume Chinese products.. not US products in the same dollar amount... assuming the same intrinsic value in both means that in time a wise China will endeavor to shrink that imbalance to an equal trade balance.. it is not in their interest to forever incur a trade surplus causing their market to suffer economic hardship... cuz they will as well..

 

[Vic]

We didn't get anything in return for our dollars?

 

[ntdz]

Originally posted by: senseamp
The Chinese lend that money back to us to buy their junk.
Trade imbalance is both good and bad. It's good if you like buying Chinese junk at Walmart. It's bad if you would like to make your own junk to sell at Walmart, because now you can't compete.

The trade imbalance is a result of us not being able to compete with China, not the cause of it.

And a trade imbalance isn't good in the long run. In the short term it's great, we get cheap goods and allow our economy to continue growing. At some point (maybe never), it'll catch up to us.

 

[HombrePequeno]

Originally posted by: charrison

Originally posted by: ProfJohn
We?ve had a trade deficit for 20+ years and our economy is still going strong.
Last time this topic came up I read an article on the net that pointed out that several countries with a trade surpluses also had poorly performing economies.

Check out what wikipedia has to say about all this
link

And you will notice when our economy is a down turn our trade is more "in balance." Carefull for what you wish for.

That would be for two reasons: incomes are lower so people can't afford imports as much and also the value of the dollar drops because of lower interest rates which cause our exports to become more competitive. There are other ways to get our current account more in balance for instance we could lower our national debt. That contributes a significant amount to our current account deficit.

 

[ebaycj]

Originally posted by: Vic
We didn't get anything in return for our dollars?

Yes, we did. Mostly cheap, loses-its-value-rapidly type of things.

example:

You buy your kid for christmas some crappy painted piece of plastic from WalMart. You pay $20. Walmart takes their cut, let's say $18 and the guys in China get, let's say $2.

In 1 year, when the toy is broken and thrown away, WalMart will still have their $18 (plus interest), China will still have their $2 (plus interest), and you will have $0.

Net result for america, $20 in, $18 out, net gain of -2.
Net result for china, $0 in, $2 out, net gain of +2. (obviously it's not $0 because it cost something to make. But it obviously cost less than $2 to make, so they still come out ahead in the net profits).

 

[Vic]

Originally posted by: ebaycj

Originally posted by: Vic
We didn't get anything in return for our dollars?

Yes, we did. Mostly cheap, loses-its-value-rapidly type of things.

example:

You buy your kid for christmas some crappy painted piece of plastic from WalMart. You pay $20. Walmart takes their cut, let's say $18 and the guys in China get, let's say $2.

In 1 year, when the toy is broken and thrown away, WalMart will still have their $18 (plus interest), China will still have their $2 (plus interest), and you will have $0.

Net result for america, $20 in, $18 out, net gain of -2.
Net result for china, $0 in, $2 out, net gain of +2. (obviously it's not $0 because it cost something to make. But it obviously cost less than $2 to make, so they still come out ahead in the net profits).

That's a fascinating but amazing inaccurate picture.

So you're saying that parents in America shouldn't buy Christmas presents for their children?

 

[B00ne]

For a country which is the militarily and economically most powerful nation a trade deficit is actually very profitable.

See you can sell potentially worthless paper and get real stuff for it. Now when the day comes you just say: ooops, world now you can wipe your behinds with those green sheets of paper you hoarded there.

Then what is the world going to do - come and demand the goods back that were shipped .....?

 

[ebaycj]

Originally posted by: Vic

Originally posted by: ebaycj

Originally posted by: Vic
We didn't get anything in return for our dollars?

Yes, we did. Mostly cheap, loses-its-value-rapidly type of things.

example:

You buy your kid for christmas some crappy painted piece of plastic from WalMart. You pay $20. Walmart takes their cut, let's say $18 and the guys in China get, let's say $2.

In 1 year, when the toy is broken and thrown away, WalMart will still have their $18 (plus interest), China will still have their $2 (plus interest), and you will have $0.

Net result for america, $20 in, $18 out, net gain of -2.
Net result for china, $0 in, $2 out, net gain of +2. (obviously it's not $0 because it cost something to make. But it obviously cost less than $2 to make, so they still come out ahead in the net profits).

That's a fascinating but amazing inaccurate picture.

So you're saying that parents in America shouldn't buy Christmas presents for their children?

The word "Example:" just before I went into my example means that its just a hypothetical situation. It doesn't need to be a toy or anything in specific. The toy represents any item that we import from China that loses its value quickly.

 

[Genx87]

Originally posted by: charrison

Originally posted by: ProfJohn
We?ve had a trade deficit for 20+ years and our economy is still going strong.
Last time this topic came up I read an article on the net that pointed out that several countries with a trade surpluses also had poorly performing economies.

Check out what wikipedia has to say about all this
link

And you will notice when our economy is a down turn our trade is more "in balance." Carefull for what you wish for.

Which makes sense as the economy slowed and our demand for products abroad will drop.

I think people make too much about trade balances. They want to look at it like a budget and see we are in the red. I look at the balances as our economy shed inefficient industries and product domestically and are buying them cheaper from non-domestice sources. It is a win for the consumer because the product is cheaper. It is a win for business because they are getting the lowest cost and thus the highest profits.

Our standard of living also increases.

 

[dullard]

The trade imbalance is probably the most misunderstood topic when it comes to economics. To put it simply: if you can afford to buy more than you can sell, then you must be in a pretty good situation. And I hope you want us to be in a good situation. Yet, so many people wish we were in the exact opposite situation.

Lets look at the two possible extremes. I realize that neither extreme will ever happen, but it clearly shows which side is more desireable.

1) Near infinite trade deficit. In this extreme, we sell nothing to foreign countries (we keep everything we produce for ourselves). Also, we buy everything the foreign countries make. Need more money, no problem. Just print more up, send these worthless pieces of paper out of the country and get all of the world's products ourselves. We get everything and it costs us nothing. What a wonderful time that would be for America. When 300 million people split up the entire world's pie, each of the Americans gets a lot of the goods/services. Heck, we can all get just about anything we want at any time because we'd have everything!

2) Near infinite trade surplus. In this extreme, we sell everything we make (we keep nothing for ourselves). Also, we don't buy any foreign goods/services. Think about it. This will "fix" the trade deficit problem we've had for all these long years. Now think further. Americans have no food, no cars, no electronic gadgets, no toilet paper, nothing at all. This is the extreme of total and utter misery.

But of course, we aren't in either extreme. Now, which extreme would you rather be closer to? I'll choose a trade deficit any day and any time. The benefits are still there. Plot a graph of GDP growth vs Trade Deficit. You get a nice trend that appears. The larger the trade deficit, the larger the US GDP grew in that year. In years when the US had a recession, the trade deficit was near zero. Also, that benefit extends out into the future. In years with an increase in the trade deficit, the next year had more manufacturing jobs, and a better GDP. In years with a decrease in the trade deficit, the next year had a massive loss of US jobs and a much worsening GDP.

All that and people think a trade deficit is bad.

No, a trade deficit is not a cause of bad things. A trade deficit the result of good things. Don't mix up cause vs effect. The key is to be as close to extreme #1 as we can be while maintaining stability (being all the way to extreme #1 for a month is bad if it means next month we swing all the way to extreme #2.)

 

[fskimospy]

Originally posted by: ProfJohn

Originally posted by: eskimospy
No, no, no.

You can make the argument that trade imbalance is a symptom of rising demand here due to a well performing economy. You can also say that same economy will spur foreign investment and lead to more growth. In those ways a trade deficit can be viewed as a good thing.

In a completely practical sense though, wealth is leaving the country. That's what a trade deficit is. Are you trying to imply that america has too much money in circulation and that by having a deficit that would be decreased, and therefore the value of the dollar increased? If so, you do not understand basic economics. (admittedly I'm no expert either) What I said earlier about cars, goods, etc... I meant that you could substitute commodities for the dollars leaving the country, and that might more concretely illustrate the net effect of what is happening.

The trade imbalance has actually significantly threatened the stability and value of the dollar, and a significant number of economists are afraid that this continued imbalance will cause the dollar's collapse, with catastrophic results for the US and world economy.

We've had this impalance for 20+ years. How much longer till the dollar collapses and the world economy?

BTW: Did ya notice that during the last world economic slow down the US was the strongest economy in the world and lead the entire world out of the dumps with its strong growth?

As long as those countries such as China, Japan, etc. that we have large trade imbalances with continue to buy dollars in order to prop up our currency, you are correct... the dollar will not collapse. When they are no longer willing or able to do so (probably willing) the dollar will very likely collapse.

 

[Trevelyan]

Our economy can be strong despite a massive trade deficit because the US Dollar is the de facto currency used in almost all oil sales worldwide. Since oil is a highly sought after commodity, there is a constant "demand" for dollars around the world.

This continuing process keeps the value of the dollar inflated, allowing us to carry large "debts" in the form of trade imbalances. This is where the term "Petrodollar" comes from.

And in all likelihood, our dollar will never lose a significant value. That is, unless, some countries start switching to the Euro to conduct oil sales. You will most likely start seeing this in the coming years.