Trade Deficits

We've got no future, we've got no past
Here today, built to last
In every city and every nation
From Lake Geneva to the Finland station
--Pet Shop Boys

I run a trade deficit with Target (TGT). I buy more goods from TGT than it buys from me. Are trade deficits a bad thing?

When I trade with TGT, I receive goods from the retailer in exchange for dollars. In accounting, I am running a 'current account deficit.' Somewhere that must be offset with a surplus--a 'capital account surplus.'

TGT must take the dollars it received from me and do something with them. That 'something' includes investment. That investment could be 'direct' in the form of new plant, property, and equipment for the retailer. Or it could be 'indirect' in the form of buying portfolios of financial securities such as stocks and bonds.

Ignoring timing issues, deficits and surpluses must balance.

The US has been running large trade deficits with many countries, including China, for some time. This has some people concerned. However, at the same time, we have been running large capital account surpluses with China as the Chinese invest billion$ in the US.

Restricting trade thru tariffs will surely reduce our trade deficit with other countries. By definition this will result in fewer goods imported that US consumers currently desire. It will also mean that foreigners will have less money to invest in the US.

Less goods and investment are not factors associated with prosperity.

When was the last time the US ran a trade surplus for most of a decade? The 1930s...a.k.a. the Great Depression.