General Discussion

louis c

(8,652 posts) Sun Jun 10, 2018, 04:59 PM Jun 2018

A few questions about trade deficits

I had a few economics classes in college and I understand some fundamental economic principals, but the trade deficit, as explained by Trump makes no sense.

Let's say I but a Toyota that's 100% made in Japan. I purchase the new car for $40,000 from an American dealership. About $10,000 of that price is American (such as dealers' and salesman's commission, transport, unloading at the American port, etc.). That's a $30,000 trade surplus for Japan and a $30,000 trade deficit for America on the "Trade Balance Sheet." However, I have a $40,000 car (or at least a $35,000 car, less immediate depreciation). Don't I have a commodity that doesn't show up on a trade balance sheet and doesn't that commodity have value?

I'm not talking about lost American jobs, that's a different matter. It's as if I buy a house. I take out a $300,000 mortgage. But I'm not $300,000 in debt. I have a commodity worth at least that much.

What am I missing here?

2 replies

= new reply since forum marked as read

Highlight:

A few questions about trade deficits (Original Post) louis c Jun 2018 OP

You did get to the main problem at the end of post quartz007 Jun 2018 #1

A trade deficit doesn't mean either country owes the other or is at a disadvantage. unblock Jun 2018 #2

quartz007

(1,216 posts)

1. You did get to the main problem at the end of post

Reply to louis c (Original post)

Sun Jun 10, 2018, 05:12 PM

Jun 2018

so yes, the main problem is loss of MANUFACTURING jobs.
Those jobs used to be 95% middle class jobs. Not only the jobs are gone, but the experience and technical know-how workers gained working there is gone.

As for $30,000 car you have, it depreciates 15-20% during each of first 3 years. Where as the $30,000 Japan has gets invested in US Treasury Bonds earning more US $$ in interest in perpetuity since our Treasury has no surplus to buy the bonds back. Or, Toyota can use that $30,000 to expand manufacturing facilities, creating additional jobs in Japan.

unblock

(52,331 posts)

2. A trade deficit doesn't mean either country owes the other or is at a disadvantage.

Reply to louis c (Original post)

Sun Jun 10, 2018, 05:42 PM

Jun 2018

It just means more goods and services went one way and more money went the other way.

In your example, goods are coming into America and cash is leaving.

There can be all sorts of negative consequences to the cash leaving. It can drive up the foreign currency and down our currency. It can cause inflation and higher interest rates. And it means more directly that we're creating jobs in foreign countries rather than here.

But we have a huge economy and also export tons, so it's not clear how much of a trade deficit we can have without creating real problems. In any event, a declining currency kinda self-corrects the problem, albeit at the cost of making nation as a whole poorer.

Reply to this discussion