Do Trade Deficits add to our Government Debt?

in Finance/Politics

If you were to ask the average Trump supporter this question, you may be surprised if they answer yes.  It would explain the popularity of Trumps trade war with his base, but it is founded on a false premise, and it goes to show how little the public knows about it.

Our Government debt currently stands at $21,120,536,200,000 at the time of this writing, or 21 trillion dollars.  That has accrued slowly through the years with $700+ billion dollar military budgets for our 200+ foreign military bases, tax cuts, Health and Human Services, Department of Homeland Security, discretionary spending, mandatory spending (paid for by payroll taxes), etc.

But the one thing that is missing from this equation is trade deficits.  That’s because trade deficits aren’t apart of government budgets.   A trade imbalance that forms the trade deficit we’re currently experiencing with places like China occurs when our fiat currency (the dollar) is sent overseas to pay for goods coming into the United States by American dollars, backed by a phenomenon called a reserve currency.

This reserve currency status the American economy has basically meant that money we send overseas is backed by nothing other then the faith in the continued existence of the American dollar, due to it’s proliferation around the world for trade in things like oil (a key reason Saudi Arabia trades oil in american dollars).

In return, we receive things like coffee makers, tv’s, clothing, and furniture.  That’s a pretty good deal if you ask me.  We send over green sheets of paper (backed by our governments good faith of course) that we print from the treasury, and we get tangible products in return.  We didn’t have to send over soy beans, cars, or semi-conductors to get these goods, just American dollar bills.

When this occurs, our currency can depreciate in value, ironically spurring manufacturing at home because prices foreigners pay for our goods become less expensive, at least that’s the theory.

So what’s wrong with this system then?

There is some agreement that the deficits (brought on by free trade pacts) had the unintended consequence of spurring a substantial loss of manufacturing in The United States since the early 1990’s. (those foreign products were just cheaper)  But could that have been avoided?  American labor is astronomically more expensive then Chinese labor, even today with Chinese hourly wages at around $3.50/hr.

All of the jobs that have been lost because of the deficit, aren’t going to come back anytime soon just because we put trade tariffs on China.  American multinationals will just move to another country like they did with Vietnam in the apparel sector.  In fact, the big problem is that American multinationals have been chasing the lowest wages around the world for years.   And unless we put a tariff on basically every industry in China, and create a trade war that could throw the world in Depression (see what caused the Great Depression here), we’re probably doing nothing but destabilizing the current economic system, risking recession, or worse.

Anyway, it’s already been predicted that the day will be near that all of the United States (and most of the rest of the developed world) will just be a service sector support economy for the middle classes that will exist in China’s future.

And, when that happens, none of this will even matter.