Should Chronic Trade Deficit (with Rest of World) Be Worrisome?

choi

(1) Steve Forbes, The Truth About Trade. Forbes, June/July 2025.
https://www.forbes.com/sites/ste ... -truth-about-trade/
("Trade deficit worriers overlook the fundamental truth expounded by Adam Smith: Each participant in a transaction gets something. It's not a zero-sum game")

Note: This is publisher's comment that appears in every issue. This comment is short, and I use it as "show and tell."
(a) "Our services export surplus [to the rest of the world] is almost $300 billion."
(i) In (macro)economics, a Taiwanese comes to America for tourism OR study (as a student for degree or not) is deemed America's export of SERVICE (obviously not goods) to Taiwan.
(ii) Shen Lu, Liyan Qi and Ming Li, Move on Chinese Students Put [American] Schools at Risk; Revocation of visas by the Us could hit university finances – and talent pipeline. Wall Street Journal, June 4, 2025, at page A5..
https://www.msn.com/en-us/news/u ... rsities/ar-AA1FKgKC

two consecutive paragraphs IN PRINT (BOLD insertions are those appearing online only) :

"China was [note the past tense] for years the No 1 supplier of international students to US universities. More international students now come [note the present tense] from India than China, though China still sends the most undergraduates [as opposed to India's more graduate students].

"That means China remains the largest buyer of education-related services, including spending on tuition and books, from the US, at $14.3 billion in 2023[, 21% more than the $11.8 billion spent by students from India, and more than six times as much as students from South Korea, another major supplier of international students to the US. In 2023,] That year, education-related services made up 5% of US services exports to the world, while they were 31% of service exports to China.

• In print but not online is an illustration that came with the WSJ article (heed the middle panel of three graphics: China, India and S Korea):
ATTACHED AT THE BOTTOM


(b) "Singapore's imports look huge because that city-state is often the first stop on the way to their final destination in other parts of Asia. The same is true of the Netherlands regarding imports to other parts of Europe."
(i) This is transshipment.
(ii) The following is old, but demonstrates how the United States, in fact all other nations, calculates trade data (both import and export):
The Balance of Payments of the United States; Concepts, data sources, and estimating procedures. US Department of Commerce, May 1990.
https://apps.bea.gov/scb/pdf/internat/bpa/meth/bopmp.pdf

Quote:

"Balance of payments statements for individual countries or regions do not necessarily indicate that the transactions measured in the accounts were in fact between US residents and residents of that particular country or region. For example, US export statistics generally reflect the first country of reported destination, but, in many cases, the merchandise is transshipped to third countries. Transshipments frequently occur from countries that have extensive port and distribution facilities, such as Germany and the Netherlands. Transactions in securities [ie, stocks, as opposed to bonds which are debts] also present problems of country attribution, because residents in countries with well-developed financial markets—such as the United Kingdom and Switzerland—often act as intermediaries on behalf of residents of other countries. Thus, the geographic allocation of securities transactions reflects the country with which the transaction occurred, but does not necessarily reflect the ultimate source of foreign funds or the ultimate destination of US funds."  pages 19-20.

"Geographic attribution.—A problem of geographic classification of export shipments in the Census Bureau data may arise when the country of destination shown on the Shipper's Export Declaration form is not the ultimate destination. For example, some shipments shown as exports to the Netherlands may in fact be destined for buyers in other European countries, but, because they are unloaded from vessels at Netherlands ports and transshipped via various modes of transportation to buyers elsewhere, the geographic attribution is incorrect. In the case of agricultural exports, BEA adjusts Census Bureau data for transshipments from Netherlands, Belgian, and West German ports, based on data from the U.S. Department of Agriculture. BEA has no data to make similar adjustments for nonagricultural products. Similar problems arise for imports when the country in which the
merchandise was grown, mined, or manufactured cannot be determined. It is the usual procedure for the Census Bureau to attribute the transactions to the country of shipment. Again, BEA has no basis on which to make any adjustment." page 33 (modifications original to show heading).
  
• Both Census Bureau and Bureau of Economic Analysis (BEA) are under US Department of Commerce.
• There is no need to read the rest of this report.
(c) "Trade exports ignore sales of stocks and bonds to foreign buyers. Trade statistics also overlook the trillions of dollars foreigners have invested in the U.S. economy."

In (macro)economics, a nationIn (macro)economics,  balance of payments has two components: current account (which in turn is made up of exhort and import of GOODS and SERVICES) and capital account.
https://en.wikipedia.org/wiki/Capital_account
(section 2 Definitions: foreign direct investment (FDI) + "Portfolio investment refers to the purchase of shares and bonds")

two consecutive paragraphs in the introduction:

" * * * It is one of the two primary components of the balance of payments, the other being the current account. Whereas the current account reflects a nation's net income, the capital account reflects net change in ownership of national assets.

"A surplus in the capital account means money is flowing into the country, but unlike a surplus in the current account, the inbound flows effectively represent borrowings or sales of assets rather than payment for work. A deficit in the capital account means money is flowing out of the country, and it suggests the nation is increasing its ownership of foreign assets.

choi

(2) Imbalance of payments | Taking Liberties. Donald Trump thinks Americans consume too much, He has a point.

Note:
(a) "Such abstemiousness is unavoidable * * * The difference between assets that Americans own overseas and those foreigners own in America has fallen to -90% of GDP. This is the kind of 'net international investment position' (NIIP) that would be hair-raising in almost any other country.   For years America could take solace from the fact that its income statement was healthy. Even as its NIIP worsened, the country earned more on its overseas assets than it paid out to foreign investors [who own American assets]."
(i)
(A) English dictionary:
* abstemious (adj; Did You Know?: "abstain traces to the Latin [verb] abstinēre, a combination of abs- and the Latin verb tenēre ('to hold'), while abstemious comes from the Latin abstēmius, which combines abs- with tēm- (a stem found in the Latin [noun neuter] tēmētum, 'intoxicating beverage,' and [adjective masculine] tēmulentus, 'drunken')"):
"formal : marked by restraint especially in the eating of food or drinking of alcohol"
https://www.merriam-webster.com/dictionary/abstemious
(B) Latin-English dictionary:
* abstinēre (v): "1: to abstain 2: to hold at a distance, avoid"  Wiktionary
(ii) net international investment position
https://en.wikipedia.org/wiki/Ne ... investment_position
("The net international investment position (NIIP) is the difference between the external financial assets and liabilities of a country.[1] External debt of a country includes government debt and private debt. External assets publicly and privately held by a country's legal residents [in addition to various levels of governments of a nation] are also taken into account when calculating NIIP.[2] * * * The International investment position (IIP) of a country is a financial statement of the value and composition of its external financial assets and liabilities. A positive NIIP value indicates that a nation is a creditor nation, while a negative value indicates that it is a debtor nation")
(iii) For income statement, see financial statement
https://en.wikipedia.org/wiki/Financial_statement

One of many financial statements of an entity is "income statement."


(b) "Maurice Obstfeld, former chief economist of the IMF * * * Barbie barbecue * * * Barriers to capital mobility, the first signs of which are buried in Mr Trump's tax bill (see next article) force up domestic interest rates and encourage domestic saving. * * * Menzie Chinn of the University of Wisconsin-Madison"
(i) Maurice Obstfeld
https://en.wikipedia.org/wiki/Maurice_Obstfeld
(1952- ; American; "is a professor of economics at the University of California, Berkeley and previously Chief Economist at the International Monetary Fund")
(ii) "Barbie barbecue" was a sectional heading in The Economist article, but I can not guess its meaning from the context.

shrimp on the barbie
https://en.wikipedia.org/wiki/Shrimp_on_the_barbie
(" 'Barbie' is Australian slang for BBQ")
(iii) "Barriers to capital mobility, the first signs of which are buried in Mr Trump's tax bill (see next article) force up domestic interest rates and encourage domestic saving."

This will be discussed in (3).
(iv) Menzie Chinn  陳庚辛 (per cn.nytimes.com in its 2013 translation; Judging by the spelling of his surname, he was born in the US)
(1962- ; middle name David; BA from Harvard in 1984, PhD from Berkeley in 1991; "By citation, Chinn is ranked among the top 500 authors of economic journals": en.wikipedia.org for Menzie Chinn)

(c) "The [US federal] government could also implement a well-designed consumption tax at the national level (the complete absence of such a levy makes America unusual)."
(i) In Massachusetts, state law dictates sales tax, at a rate of 6.25%, but not all items at a supermarket are assessed (eg, supermarket-prepared food such as rotisserie chicken is assessed, which makes sense because all items in the latter are assessed with sales tax; but not packaged food from manufacturers, such as Doritos chips). There are no additional local sales taxes imposed by cities or counties.
(ii) consumption tax
https://en.wikipedia.org/wiki/Consumption_tax
("such as a sales tax or a value-added tax * * * An excise tax is a sales tax that applies to a specific class of goods, typically alcohol, tobacco, gasoline (petrol) [which are common in the United States and, especially, Europe]")
, whose section 1.1 explains value-added tax (VAT).

VAT is popular in Europe (including Britain), but absent in the entire United States (at both federal, state or local level).
Taiwan has neither sales tax nor VAT. Japan imposes national sales tax.

(d) bonus:
I had doubts after reading reading this article, which started with overspending by American consumers but then changing tack to blame federal budget deficit of the United States. However, another report says the same thing.

Janice C Eberly, Gian Maria Milesi-Ferretti, Maurice Obstfeld and Jón Steinsson, Why does the US have a trade deficit? Brookings Institution, Apr 17, 2025
https://www.brookings.edu/articl ... ve-a-trade-deficit/

(i) introduction: "On the day that President Trump announced a new, sweeping round of tariffs on all US trade partners, Brookings Senior Fellow Gian Maria Milesi-Ferretti was joined by Maurice Obstfeld of the Peterson Institute for International Economics to discuss Obstfeld's new paper, 'The US Trade Deficit: Myths and Realities [in Brookings Papers on Economic Activity (BPEA; a semi-annual online journal)), Mar 26, 2025].' On this episode of the Brookings Podcast on Economic Activity, Miles-Ferretti and Obstfeld explore the causes and consequences of the U.S. trade deficit, the role of China and other foreign nations, and broader implications for the American economy.

(ii) EBERLY: " * * * Maury [nickname for Maurice (Obstfeld)] argues that US borrows so much from the rest of the world to finance our budget deficit that it’s inevitable that we run a trade deficit. These two deficits ]twin deficits] both reflect the fact that we consume more now than our current income can support. * * *


(iii) MILESI-FERRETTI: " * * * I wanted to ask you how you see the role of China. You've touched upon it already in your remarks when talking about the hollowing out of [America's] manufacturing, but there is this view out there that China is largest creditor of the United States, which is absolutely incorrect. But how do you see the role of China in explaining the dynamics of the U. current account and US liabilities?

OBSTFELD: " * * * Chinese reserve accumulation really becomes important after the global financial crisis. It really spikes up. And then, of course, China has its own crisis in the mid-2010s, where it spends a quarter of its reserves [about $1trn] defending the currency. And, by the way, if that were the main driver of the US current account, we should have seen a trillion-dollar improvement in the U.S. current account balance. We did not. So just putting that factoid out there.

"Now, I think even today the importance of China is exaggerated. Now, let me be clear. There's no doubt that the fact that China suppresses consumption and runs a surplus contributes to the overall U.S. deficit – in terms of a global equilibrium, that would have to be the case. And there's no doubt that China pursues strategies of overcapacity and export promotion that can be injurious to competing industries elsewhere. Those things are definitely true. But to blame the overall US deficit on China and those practices is just quantitatively way off the mark.

For one thing, trade practices are second-order determinants of the overall current account. And secondly, China's surplus is only about a third of size, at least in 2023, of the U.S. current account deficit for that year. Now, the 2024 numbers we’ll know better in a couple of weeks when the IMF releases its world economic outlook but most of the global surplus that is the counterpart of the US deficit actually comes from advanced economies at the moment.

MILESI-FERRETTI: "Absolutely. And indeed, those are the largest creditors of the United States. And although China runs a still large bilateral trade surplus vis-à-vis the US, its investment pattern has changed dramatically since those years when fundamentally the Chinese surpluses were mirrored by an accumulation of reserves. China is investing in other emerging economies, Belt and Road initiatives and other, uses its dollars in a different way and its claims on the US have remained actually quite stable in dollar terms and so declining as in relative terms [when factoring in inflation]. * * *

choi

(3) The next article was:
Section 899 | Capitol Control; Who would pay America's 'revenge tax' on foreigners? The Economist, June 7, 2025, at page 65
, which intentionally used Capitol (though it also meant capital control), because US Congress had enacted the law at issue.

But a better and shortre summary appeared in the same issue:
America budget | Capital Pains; Taxing foreign investors could do more damage than tariffs. The Economist, June 7, 2025, at page 10 (in section Leaders)

Quote:

"It is a worrying new front in the trade war. President Donald Trump's tariffs have been highly disruptive, but at least America's economy does not depend heavily on trade, which as a share of GDP is less than half the rich-world average. The same cannot be said for foreign investment, on which American is unusually reliant. Foreigners own $62trn-worth of American assets (including derivatives) compared with only $36trn owne abroad by Americans. The balance, at -90% of GDP, is by far the lowest 'net international investment position' of any big, rich economy (see Finance & Economics section which is the preceding (2)] ). One third of America's government debt, amounting to $9trn, is held by foreigners [governments and nationals alike].

"Capital protectionism will also badly hurt the rest of the world. Other countries could, ultimately, create their own trading arrangements and make do with restricted access to America's goods market thanks to Trump's global tariffs], which account for only 15% of final demand for [world's] imports. Being denied entry to Wall Street is another matter. American stocks account for about 60% of global equities by value, and the dollar is the world's reserve currency. Even if American investments no longer produce outsized return [this clause suggests they do], foreigners would lose the benefitsof diversification. The allocation of capital across the globe would be distorted, making the world economy less efficient, and therefore poorer, over time.

"And didn't other rich-world countries start the tax war by ganging up on America's technology giants with 'digital services taxes' and other rules designed to extend the reach of their tax systems across border?

Note:
(a) Quotation 3 mimics the rhetoric of America's angst toward Europe's, not China's, digital services tax -- and enacted section 899 as revenge against Europe (specifically its firms and nationals who invests in the US and then seeks to repatriate any profits by teaxing the gain as high as 20%.
(b) In any event, section 899 was called off.

Richard Rubin, 'Revenge Tax' to Be Taken out of GOP Bill. Wall Street Journal, June 27, 2025, at page A4.
https://www.wsj.com/politics/pol ... x-rates-g7-37fd1046

the first three paragraphs:

"WASHINGTON—The US and other countries reached an agreement to exempt US-based companies from some corporate taxes that were part of a 2021 international minimum-tax agreement, Treasury Secretary Scott Bessent said Thursday 0June 26, 2025-.

"The agreement among the Group of Seven [G7] largest economies means the 'revenge tax' being contemplated in Republicans' tax-and-spending bill should be removed from the legislation, Bessent said. The provision would have imposed additional taxes as high as 20% against companies from countries that imposed what the US deemed as discriminatory taxes.

"Th potential tax, which would have become Section 899 of the tax code * * *