Trade deficit

Explain why a trade deficit is bad.
Not a leftist, just clueless about economics and trying to wrap my head around why a trade deficit is bad.

It isn't.

Just think of China like a store, you wouldn't stop buying inexpensive goods from your local grocery just because someone pointed out that you have payed them more than they payed you. You simply wouldn't care because you know that you have a huge services surplus with the place you work at that allows you to run trade deficits with your local stores, accountant, plumber etc.

Pay for more, get less

It's something defeated nations with no ambitions ignore. When you think your time is over and you're honna decline from now on, it's easy to give up on all benefits of producing goods locally and accept large trade deficit because ahiny colourful beasa are cheaper this way.

Beads*

Yeah how I understand it is:
Let's say US imports $1000 in cars from Germany, exports $500 in cars
US has to pay Germany $500
In this scenario US isn't as good at making cars as Germany is
So fewer jobs in car industry in US
So more US workers free to do other jobs in which the US excels

Am I misunderstanding something here?

Explain? How are you getting less? I understand it as: import 10, export 5, pay 5. So no one is losing anything anywhere, right?

But why would you produce beads locally while the beads produced in Japan are much better? If you don't produce as many beads locally, you're going to be able to employ more workers in, for example, producing toys. Producing toys might be something that you're much better/cheaper at than Japan, and they'll import those from you

Essentially yes.

There's also the fact that industries and occupations reliant on cars (i.e. car dealerships, mechanics, delivery etc.) will tend to excel if higher quality/cheaper cars can be imported from Germany. The only occupations that suffer are those directly involved in the manufacture of cars.

Germany builds up its industrial base, technical culture and brand image while the US decides its car manufacturers are defeated, its designers brainless and all that's left is to buy superior German car and wait for US to collapse in yet another area

A trade deficit is good if you think about it

Also note that both Germany and Japan are concerned with trade deficit and introduce various measures to keep their industry running against all odds.

Wow... never thought about it that way.
Really makes you think.

This is implying that Germany makes cars, while US sits on its ass doing nothing. My idea is that Germany makes cars which US consumers buy, so the US industry has to focus less on producing cars and can instead employ people in other fields of work, which might be areas where the US is much better at than Germany and where Germany is importing a lot, for example services as seen in

Take country A that bought everything from country B. A produced nothing at all. So all A's money goes to B eventually. Reality is more complex but you get the idea. Even a small deficit over time can cause large amounts of wealth to leave the country.

Why would it be a good thing? I'm under the impression it's neither good nor bad

But wealth doesn't leave the country, right? If I pay $5000 for a car that is worth $5000, I don't magically lose $5000 in wealth. I don't have the money on hand, but I can still sell the car for money if need be

A trade deficit isn't necessarily good or bad. It can become a concern if too much of your currency is held in foreign countries, but most of the time a trade deficit really isn't a huge issue.

So for example if the US GDP is $100, and they keep importing more and more stuff, and eventually $20 of those $100 would be in other countries, at that point it'd be a problem because if people want to exchange their stocks/whatever for cash there wouldn't be enough money for everyone?

That's called a comparative advantage in economics. Country C1 able to produce X good at a lower opportunity cost than country C2.
The problem is that China, India and Southeast Asia have a comparative advantage when it comes to manufacturing. A few reasons for this, including but not limited to: location (closer to the resources, less expensive to transport them), and wages (cheaper labor). Because of this, the likelihood of corporations to spend the money to have resources imported to America (expensive) and employ American workers at minimum wage, bare minimum (expensive), is very low. Ergo, manufacturing will never have a resurgence in America, we simply are at a disadvantage geologically.
The next step then is to move beyond manufacturing and create new low skill jobs for laborers; Or you could suck it up and pay the costs of minimum wage and transporting resources; or you could try and find cheaper resources; or even try and find a new way to make the stuff we want using methods we have a comparative advantage in, but this last one is by far the most difficult and requires the govt to deregulate much of the policies preventing innovation in the name of safety or security.

Yeah, the main idea is that a trade deficit can cause a weaker currency which can be an issue if you prefer cheaper imports and more expensive exports. However there are many more factors at play and despite the US trade deficit the dollar has remained strong.

You don't win war by retreating constantly. There is time for last stands and there is time for counter offensives.
Giving up on auto industry means giving up on indigenous development in high end industrial automation for example - the staples of it like manipulators or PLCs were all developed by car manufacturers. It's too worthwhile source of innovation to give it up.

Also in case if German and Japanese car industry collapses for one pr the other reason, the US with its not so great but existing car industry takes over the lead, while the nations that gave up - like Great Britain just change their suppliers of cheap beads

Ahh, okay I understand. I get why you wouldn't want a huge trade deficit then.
There's something else I don't understand: Germany and the Netherlands are two export countries. How come we have such a huge trade surplus, while labor here is probably just as expensive, or at least almost as expensive as in the US?

Google foreign exchange reserve system. Countries are not people nor are they businesses. Economics is not simple enough to be explained through řelatable metaphors.

Because eu regulations are tailored to protect some of the industries in union, particularly in the 'old' eu.

So you have retarded fees on cars with large engines(something Americans excelled at) tariff for aircraft parts(airbus says hi) and quotas on agricultural production within the EU(feels like commie times)

Btw try to exporting something TO China. Remember this the next time when Chinese will argue that XXX country should become more competitive instead of violating the sacred free trade, because the rule is - free trade for vassals, protectionism for sovereign

This has to do with what Germany and Netherlands produce. In a capitalist economy, production is everything, followed by selling and turning profit on that production. Germany and the Netherlands do not produce a diverse amount of goods compared to the US, and therefore needs to import a lot of what the US is producing, which offsets how much the US spends on what they produce.
An example is let's say the US produces 4 goods, and Germany and the Netherlands only produce 2. (I made this up, but concept applies.)
US Plastic to Netherlands= $100
US Food to Netherlands=$100
US Clothing to Netherlands=$100
US Cosmetics to Netherlands=$100
Assume Same for Germany
Now the US imports from N and G
G Cars to US=$100
G Whatever to US=$100
Same for N
US: In: 200, Out:400, Net Flow: +200 (surplus).
G and N: In 400, Out 200, -200 deficit

Forgot to add, being a huge exporter means nothing if you're a huge importer as well.

Alright so basically the reasons a trade deficit could be bad are:

- Could devalue the currency if deficit is too big
- Importing more than you export means that own industry can't compete, so in time your industry will disappear, leaving you with nothing
And the reason trump is imposing tariffs is so that consumers start buying US made products so own industry gets stimulated

On a very basic level, of course
Am I understanding it correctly?

>Giving up on auto industry means giving up on indigenous development in high end industrial automation
That's not entirely true. Global production lines for cars often utilise American designs for both the chain of production and the cars themselves. This is especially true for countries like China that lack the technical talent and thus routinely design technology that almost no one outside of China wants to buy.

This doesn't even get to the fact that cars are just one slice of industrial manufacture, US brands dominate a large share in the market across pretty much all tech.

That's a good Trade 101 rundown.

>
>Explain? How are you getting less? I understand it as: import 10, export 5, pay 5. So no one is losing anything anywhere, right?

Except we aren't paying the 5. We pretend the 5 don't exist until the interest builds beyond our capacity to pay our debt. Also, it would be more accurate to say that the government borrows from its own people, as most of the United States' debt is owed to its own people.

Alright, thanks
Actually learned something today

I like how you absolutely ignored the technical culture argument. Which is the key here.
And why do you think there are American automation experts in the first place? Because America was absolutely massive industrial country and in many ways still is. China industrialised fairly recently, so they didn't develop technical culture yet. Japan on the other hand did and it rivals the US in automation and production tech. Deindustrialises UK meanwhile starts being a pariah state. In the 1980s they couldn't develop a fucking rifle for their army and what they did develop had to be fixed by Germans. Kill industry-> kill technical culture-> become backwards shithole

Wait what you aren't paying for the goods you import?
Factory in Japan makes a car, sells it to US dealership, gets $1000
Factory in US makes 1000 bottles of cola, sells it to japanese grocery store, gets $500

No one has any debt here, right? US government doesn't owe Japan anything, no one loses anything

>ignored technical culture argument
Unintentionally. Reason I asked for confirmation is that I wasn't sure I got everything.

>And why do you think there are American automation experts in the first place? Because America was absolutely massive industrial country and in many ways still is.
Sure, but there's no reason to believe that US domination in design won't continue just because the manufacturing is outsourced more and more. The key factors to the success of US tech firms are brands and high skilled labour composition neither of which require that there be any permanent manufacturing base in the US.

>China industrialised fairly recently, so they didn't develop technical culture yet. Japan on the other hand did and it rivals the US in automation and production tech
I'd expect that some time in the future we will be buying Chinese designed smartphones and laptops but demand for better and better tech always advances and the US already has such a head start on even most developed nations. South Korea is a fundamentally unsustainable model that is far to centralised to allow for innovation so I won't get into them but Japan is pretty much still at the stage of car and low end other tech design (cameras, calculators etc.) and generally lacks the labour composition and the branding to progress into laptops, smartphones etc. and China isn't even really in the market yet for global tech design. Meanwhile the US has several private space travel firms, self-driving cars and some of the most complex consumer and commercial software on the market. By the time any Asian country has reached this level America would've already gone through the next three big developments in tech.

The point of sustaining some industries is also more complicated.
Auto industry is a bad example here because the sole fact that in times of war, both the production lines and the cadre can be adapted to producing war materials means nobody in his sane mind would allow it to fall.

Allowing your local industry to disappear even on favourable terms - like clothing where the west designs what Chinese make in sweatshops, makes you easy prey for asian tiger strategy. It's very well visible in case of consumer electronics where once dominant US was thwarted by Japan which in turn was destroyed by Korea and then by China(I'm overdramatising).

Asian tigers are protectionist and they dominate their markets easily. Even reminding myself American company that made consumer electronics that weren't computers is hard - can you name 1 American brand of radios or video players(can be laserdisk for all its worth) or tvs? Japanese are easy - sony, panasonic etc. Korean -samsung obviously. Chinese are kinda rising but they will be there.

But where does this high skilled labor coming from in quantity? Education system. Education system that has to be manned by less and less people with practical experience(those who have experience have to travel a lot to keep their real jobs, they can't do their jobs for local industry anymore). Meanwhile in Asia there have to be people who have to work on site, and can later teach their successors from not as advanced experience yet. Give it a go for few generations and it'll be the west that lags behind China and India.

I still don't really get the problem though. Okay I understand you wouldn't want entire industry sectors to disappear like auto industry. But why is it such a big deal that America has to keep making TVs? Why isn't it enough to be world leader in far more advanced tech (CPUs, GPUs etc)?

Trade deficit is money your country spent on things from other countries. It is the outflow of wealth from your country to another country.

Why would anyone want to dominate global economy? Hmmm... mhmm....hmmm...hmm

What?

I'm asking why would the US waste space, factories, labourers, money, to dominate a relatively primitive market, while they have a far more advanced market in GPUs and CPUs. Does the US care about dominating the worldwide bread market? I wouldn't know, but I'm guessing they don't, because dominating other, more worthwhile markets is far more important.

G – T = (S – I) – (X– M)
or
X - M = (S - I ) + (T - G)

X is exports
M is imports
S is savings
I is investments
T is tax paid
G is government spending

Therefore, if the trade deficit is large (eXports - iMports > 0), something on the right hand side has to compensate.

t. studying CFA

automation is taking american industrial jobs, not trade deficits

theres a freaking robotic burger flipper for fast foods now and nobody is doing anything about it, certainly not trump

because cpus/gpus are not made in the US for the most part. Literally our biggest industry is scrap metal exported from California.

Alright this makes a lot of sense. It took me a while to understand what it says, but I think now I get why a trade deficit is bad. Essentially it boils down to that it's money leaving the country, and this either means the government will go further into debt, or has to lower spending or raise taxes, correct?

Not really, the ins and outs of an automated production line is pretty easily transferred information. Besides, practical experience of someone who's worked on a production line isn't nearly as important as someone whose designed a production line for someone learning how production lines are designed.

It is like welfare
It makes you dependent on other people

Well articulated Jan.

If the trade deficit increases (i.e. X-M), then:
1) the government balance (T-G) must change, i.e. taxes must increase or government spending must decrease (or if neither change, debt must increase)
or
2) The domestic private savings (S) vs. level of investment (I) into the economy must change.

The US has gotten away with this for so long because the USD is the world's largest foreign currency reserve. This means that a lot of countries squirrel away money to stabalise their own currencies.

And finally, in theory, if you want to make the trade deficit better, you can do a few things.
1) Increase private domestic savings. Keep American money in America.
2) Borrow less money. Stop funding the T-G. Either increase taxes or cut government spending.
3) Rapidly depreciate the USD in value. A weaker dollar makes imports cost a lot more and makes exports cheaper for foreign countries to buy. The unfortunate point about this is that devaluating the defacto world currency reserve devaluates the world economy also.