by Elliott Morss, Morss Global Finance
Introduction
Many bemoan the large US trade deficit which represents the difference between the export and import of certain goods and services. Since 2000, the US has run an annual deficit ranging between $362 Billion (2001) and $762 billion (2006). Imports require Americans to spend dollars thereby increasing global dollar supplies while US exports reduce dollar supplies. That means imports should weaken the dollar while exports should strengthen it. It follows that such large deficits (net imports) should also weaken the dollar.
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But overall, the dollar has not weakened. Since 2000, it has gained 16% in value against the Chinese Yuan, gained 21% against the Japanese Yen and stayed the same against the Euro. With the exception of the British Pound (up 37%), the dollar is mostly stronger against other currencies. How can this be? There are several factors at play.
Problem with the Definition of “Goods”
Above, I defined the trade deficit as the difference between certain goods and services. What is missing? Two of the most popular US “exports” are debt and private equities. Foreigners view them as safer than similar securities from their own and other countries. But they are not included in the trade definition of goods and services. Of course, unlike most other goods and services, they can be both bought and sold. But consider long term debt and equities, neither of which would be considered trade “adjustment” transactions. Just how important are they?
Table 1 includes data on the traditional US import and export items along with long term capital flows in and outflows. Note how important long term capital flows can be. In 2013 and 2014, net capital inflows more than neutralized the trade deficit.
Table 1. – US Trade and Capital Flows (mil. US$)
Source: US Treasury
Debt
Table 2 provides detail on bond capital flows. US bonds, both Treasuries and corporate are quite popular with both foreign governments and the private sector. And the coming higher US interest rates will make US debt even more attractive to foreigners. In 2016, foreign governments liquidated Treasuries. But their private purchases of corporate bonds were even greater than the Treasury sales.
Table 2. – Foreign Purchases, US Bonds * (mil. US$)
Source: US Treasury
* Negative numbers constitute sales
While the US government does not purchase foreign debt or equities, the private sector does. Table 3 provides data on US purchases of both foreign government and private debt.
Table 3. – Private US Purchases, Foreign Debt* (mil. US$)
Source: US Treasury
* Negative numbers constitute sales
Table 4 sums the numbers from Tables 2 and 3. It appears that overall, foreigners buy far more US debt that American buy foreign debt. In short, the US sales of debt are a reliable export item for the US, even though it is not considered an export item in the national accounts.
Table 4. – Bond “Exports” and “Imports”* (mil. US$)
Source: US Treasury
* Negative numbers constitute sales
Equities
The international trade in equities is not included in the trade numbers. However, as Table 5 indicates, these flows can be significant. And while Americans buy large amounts of foreign equities, foreigners buy even more US equities. And since 2012, foreigners have purchased nearly $244 billion more US equities than Americans have purchased foreign equities.
Table 5. – Equity Purchases (mil. US$)
Source: US Treasury
Other Balance of Payment Items
There are other factors working to neutralize the effects of the US trade deficit. The dollar remains the closest there is to a global currency and every year, more dollars are needed to serve this role. Also, the US has invested large amounts overseas and income from these investments is significant. As Table 6 indicates, the net investment income flows in 2016 were nearly $192 billion. Secondary income payments constitute a net outflow. The largest component here is worker remittances to other countries.
Table 6. – Other International Receipts and Expenditures (mil. US$)
Source: US Bureau of Economic Analysis
Looking Ahead
Of course, capital flows are not like the imports/exports of goods and services. Capital flows can be reversed. But most nations have a stake in keeping the dollar strong inasmuch as they hold a lot of them. And it does appear that the US trade deficit is declining. The average for the 2004-08 period was $698 million. For 2013-16, it was $488 billion. Part of that might have to do with labor saving technologies. The labor cost of manufacturing is now only 20% of the total cost. This reduction in the labor cost share should favor developed nations where hourly labor rates are higher.
