It's the living standards, stupid!
Posted by aogFriday, 12 March 2004 at 11:42 TrackBack Ping URL

Stories about the trade deficit always seem to be rather shallow. Without giving in to the hype, we are shifting to an information economy where information is the highest value kind of “stuff”. The balance of trade numbers don’t include services at all. So if a company in Japan pays a US company $100 to do packaging design while selling $50 of games to the US market, that counts as a $50 trade deficit, even though the US ended up with $50 more than Japan. This is something to keep in mind when people talk about “empty ships” leaving US harbors.

If there’s a trade deficit,it only matters in the long run if it enables increasing foreign ownership of US assets. That doesn’t seem to be increasing (the alledged Japanese take over of the American economy in the 80’s and 90’s turned out to be the Japanese getting ripped off paying way too much for damaged goods). And even if it were, it would have to get very large in order to make any real difference and be much more than US ownership of foreign assets. None of the trade deficit hawks seems to notice that (for instance) US car companies have been buying up other car manufactures around the world. If Ford buys Mazda and then Mazda imports add to the trade deficit, is it really a deficit? This kind of mixing is becoming the norm, not the exception. If foreign governments subsidize imports to the US, then in effect foreign taxpayers are forking out to improve US living standards. That’s OK with me.

Ultimately none of this really matters. If the US economy is growing and becoming more productive, living standards in the US will improve. That’s what we need to keep an eye on.