An Offer We Can Refuse
"The largest trade deficit in the history of trade deficits, maybe ever." That's how that classic, ol' Donnie T quote goes, right? Something like that…
Regardless, it is certainly the case. Earlier this week, the Commerce Department dropped some data on the United State's performance in international trade last year. And, as yesterday was the NBA trade deadline, this seems like an apt time to take a look at the US 2022 season. Spoiler: it was far from an MVP year.
The trade deficit is a measure of the difference between a country's imports and exports.
Exports > Imports = a Surplus; Imports > Exports = a deficit; it's that simple.
But, the trade deficit is just one part of a larger calculation called the Balance of Payments. The Balance of Payments is kind of like a country's balance sheet with respect to its dealings with the rest of the world. On one side, you have the current account, measuring the flow of goods and services from a country to the rest of the world. The other side of the equation is the capital account, a measure of the flow of financial assets from a country to the rest of the world.
In theory, the Balance of Payments should always equal zero. Remember, it's economics, so a theory is more of a "theory," but this one tends to hold up, albeit with minor measurement-driven errors. Every dollar in needs a corresponding dollar (or good/service in the value of $1) out.
Are you confused enough yet? Good, because the US 2022 trade deficit of $948.1bn was the largest ever recorded, representing a 12.2%, or $103bn, jump from 2021.
That might sound like a HUGE problem, but controlling the global reserve currency gives the US a bit of gravitas in the game of global trade. Much like my bank account, a growing deficit has become economic normalcy for the US.
And that's largely what this record deficit represents. As the impacts of the pandemic subside, global supply chains, demand, and exchanges of goods and services are slowly but surely returning to pre-C-19 trends. The widening deficit reinforces the US's reliance on other countries for goods and services (mostly goods) and generally gets accounted for by increased foreign investment into the US and, less so, increased borrowings from foreign countries.
Basically, what we're seeing confirms a couple of things. The US does not make nearly enough stuff to satiate consumer and business demand. Legislation like the CHIPS act seeks to remedy this, but it's nearly impossible for US goods to be cost-competitive with those from overseas.
Moreover, the US remains the investment capital of the damn universe. Dollars flow in hand over fist for a variety of investments, notably last week into treasury securities sitting on top of newly jacked-up interest rates.
And that right there was the big story of the year: the strength of the US dollar. There are about 752 bajillion things that impact a currency's exchange rate, but one of the largest drivers is the monetary policy of that currency's nation. You may have noticed things got just a tad bit tighter in the US last year, spiking the value of the USD against basically everything else.
This is super-duper helpful for driving foreign investment but super not helpful for reducing a trade deficit. As the USD value skyrockets, goods priced in USD become relatively more expensive, reducing demand for US exports. On the other hand, this will only increase imports as foreign-made goods become relatively cheaper to consumers buying in USD.
Let's take a breath because even my brain is fried after reading that over.
TL;DR: a rising USD value contributed strongly to normalizing international trade by spurring a larger US trade deficit while driving more investment to the US. It's a long road back to 2019 times, but directionally, we're coming.
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