President Trump is falling woefully short on his promise to fix the trade deficit. It's on track to hit $570 billion this year — up from $505 billion in 2016.
Critics blame the trade gap for lost manufacturing jobs, and apologists assert it permits Americans to consume more and cheaper products without much harm.
Both arguments have some merit but such a yawning trade gap must be financed. Foreign governments and private persons buy U.S. Treasuries, corporate stocks and bonds, and real estate in tony locations like Manhattan and Miami Beach, and we have to pay interest, dividends and rent on those assets that grow larger each year.
Americans make similar investments abroad but earlier this year, the U.S. net international investment position (NIIP) was estimated to be a negative 45 percent of gross domestic product and it is on track to surpass 60 percent within the next decade.
At that level, other countries have generally encountered a major economic crisis as foreigners balk at extending additional credit but the dollar's status as the reserve currency—foreign central banks hold Treasuries and greenbacks to back up their currencies— make a wholesale U.S. meltdown less likely.
Still as our indebtedness grows, private creditors will get nervous and insist on much higher interest rates, making Treasuries a poor long-term investment for insurance companies and individual retirement accounts.
Economists are inclined to believe bilateral deficits — or even deficits in particular commodities like oil — don't matter. However, if one country or commodity is a huge share of the global imbalance then the global problem can't be addressed without tackling the particular country or commodity.
China accounts for more than 60 percent of the U.S. trade deficit and petroleum a good deal of the rest.
The Trump administration proposes to fix the China trade by applying pressure to open its markets — if Americans can sell more in China, then we can continue to enjoy cheap consumer goods at Wal-Mart. And by liberating the oil and gas sector from Obama-era regulations and continuing to build out wind, solar and other renewable energy sources.
