The trade deficit is a sign of wealth
The best way to keep America great is to ensure it remains the world’s most important economy.
The U.S. trade deficit is easily understood without any reference to international finance. We have a trade deficit because foreigners send us more goods and services than we send them. Foreigners work hard to produce the goods and services they send us, and, of course, we work hard to produce those we send them. Our trade deficit simply means that foreigners are working more to serve us than we are working to serve them.
Looked at this way, the deficit doesn’t sound so bad. Most people would prefer to have others working for them than to work for others. The easiest way to separate the rich from the poor is to identify who is working for whom.
In financial terms, the deficit is the difference between the money we pay foreigners for what we import and what they pay us for what we export. The annual trade deficit is equal to the net money we send foreigners each year. The annual U.S. trade deficit is now about $1 trillion, which by any measure is a lot of money.
Foreigners want dollars. They hold on to them. They don’t use them to buy more goods and services from us because they need the money for international transactions. The U.S. dollar is the primary currency used for world trade. It’s also a secure store of value. So long as our inflation rate isn’t too high, the U.S. dollar is useful, safe and secure.
Around the world, the ability to hold wealth in a secure form is incredibly attractive. Local alternatives often pale in comparison. So the U.S. is in the business of selling financial security to foreigners. That’s why they are willing to hold U.S. dollars. If the security we sell to foreigners were counted as a service, we’d have no deficit.
Many foreigners also use their dollars to buy U.S. stocks and bonds. Their purchases lower the costs of capital for American companies, which allows us to invest more for the future. Perhaps more than anything else, continuous investments in the future have made America great. And foreigners are strengthening the U.S. by helping supply the capital necessary for growth.
The most remarkable part of the story is that a large fraction of the dollars we send foreigners are dollars that we simply print. The Federal Reserve creates dollars when it buys government bonds with funds that it doesn’t have. To pay for those bonds, the Fed simply increases the banks’ account balances at the Fed. The benefit of living in the world’s primary reserve currency country is that foreigners give you goods and services for money printed out of thin air.
President Trump is trying to eliminate the trade deficit by imposing high tariffs on U.S. trading partners. If he succeeds, Americans will end up working relatively more for foreigners. This tariff policy will impoverish Americans, and it will reduce the capital available to American firms to invest in the future.
The best way to make America great is to ensure that we continue to be the most important economy in the world. Tariffs will reduce the world’s dependence on the U.S., which will make us poorer and less secure.
Mr. Harris is a finance and business economics professor at the University of Southern California.
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