The totally backwards assumption underlying the entire global trade debate

We need to talk about the trade deficit

We need to talk about the trade deficit.

That's the current account balance, in technical economic speak. It's the sum of all goods, services, and investments flowing out of America to other countries, and from other countries into America. If the balance is positive, America is exporting more goods, services, and investments than it's importing. That means we have a trade surplus. If the balance is negative, America is importing more than it's exporting, and we have a trade deficit.

Now, when a rich country that's already highly developed is trading with a poor country that's trying to develop, textbook economics says a very specific thing should happen: The rich country should run a trade surplus, and the poor country should run a trade deficit.

There's a pretty straightforward reason for this: Poor countries have very little wealth to spread around. So if they're going to build up their national infrastructure and their technology, and still feed, clothe, and house their people at the same time, they need to bring those resources in from outside. Hence, a trade deficit.

Another way to look at it is this: If one country is running a trade deficit with another country, the first country must, as a matter of mathematical necessity, also be a net borrower from the second country. The first country is buying stuff from the second country, and giving them nothing but its own currency in exchange, so the second country must wind up holding more assets in the first country's currency. Which all makes sense: If a poorer developing country is bringing in resources from outside, it's going to be borrowing more than investing with its own money. And the rich countries have the money to lend.

The U.S. is definitely rich, and poorer countries across Latin America, Africa, and Asia are certainly trading with us in order to become rich, too. And yet this is America's current account balance:


It's completely backwards! We're importing more from the world than we're exporting. Despite being incredibly wealthy, we're net borrowers. What's even crazier is that some of those developing countries in Asia, Latin America, and Africa have been net lenders to America. There's a reason that economists Dean Baker and Monique Morrissey titled their study on this phenomenon "When Rivers Flow Upstream." It makes no sense, yet it's happening.

It's incredibly important to keep this in mind whenever political controversies erupt over global trade. Because at this point, the existence of our trade deficit has been effectively normalized in U.S. politics. Major economists and elite commentators regularly dismiss the idea that anything needs to be done about it. The Trans-Pacific Partnership, a massive trade deal covering some 40 percent of the global economy, is bring pushed over objections that it does nothing to alleviate the trade deficit. Paul Theroux and everyone else who got in on the ruckus he started (including myself) effectively treated the trade deficit as a normal feature of globalization. Maybe it's an unfortunate given, and one the U.S. government should be counterbalancing with other policies, but a given nonetheless.

Except it's not. It's a deformity of what global trade between rich and poor countries should look like. And as Baker recently explained to The Week, it's a deformity caused by the very deliberate choice of Western elites — mainly in the United States — to impose massive austerity programs on developing countries in the 1980s and 1990s, via institutions like the International Monetary Fund (IMF).

That has consequences for U.S. workers. Our trade deficit means domestic demand is being used to generate economic activity in other countries rather in this one. That's going to lower the overall level of output the American economy can achieve, and make it harder to generate enough domestic jobs for everyone to work. You can counterbalance that effect with looser monetary policy: Printing more dollars will lower the value of U.S. currency, making or exports cheaper and thus driving down the trade deficit. Or you can have the U.S. government run a bigger budget deficit to replace the aggregate demand lost to the trade deficit. Or both.

Except, just like the consensus of Western elites (both in America and Europe) congealed around austerity for developing countries, it's congealed around tight money and low government deficits here at home.

In the case of IMF-imposed austerity, countries like Bolivia and Greece were forced to gut public investments, slash their social safety nets, and hand resources over to private corporations, all so they could funnel repayments to rich western creditors. Meanwhile, here in America, opposition to loose money and sufficiently large budget deficits has ensured a seemingly endless run of high unemployment. American policymakers are pushing on both sides of the equation in a way that effectively guarantees the American economy can't increase output and achieve full employment. That's driven down workers' wages and hobbled our own safety net and public investments, creating surplus wealth that's once again been funneled to the elite.

It's not the trade deficit per se that's killing American jobs, and it's not even the international policy Western elites imposed on the developing world via the IMF. It's the specific combination of that international policy and elites' preferred domestic policy that's killing American jobs — not to mention delaying the ability of other countries to rise out of poverty.

I've argued before that we shouldn't view the struggles of U.S. workers and the struggles of the global poor as fights that are in tension. Those two struggles actually combine to become one. In both cases, the policies amount to stripping wealth from less powerful people and allowing the rich global elite to gobble it up for themselves.


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