A trade deficient or a trade surplus unto themselves are not necessarily bad things. A trade deficit simply means that you buy more from your trading partner than he buys from you. The opposite is true with a trade surplus. You have a trade deficit with Wal-Mart, but a trade surplus with your employer. If you are a business you have a trade deficit with your vendors and a trade surplus with your customers. However between nations, such as the US and China, since there is no common currency, the result of a trade deficit limits what the trading partner can do with its proceeds. We run a trade deficit with our trading partner China.
The result is that China has a trade surplus with the US and thus has excess American dollars. China can use the surplus dollars it has from its trade surplus with the US in basically three ways. 1.) it can buy more of our exports 2.) it can buy assets denominated in US dollars 3.) it can buy our sovereign debt in the form of our US Treasury (T-Bills). If China used all its dollars to buy our exports we would be trade neutral, but since China has a trade surplus with the US, China has surplus dollars. These surplus dollars, since they were not used to buy US products or services, can be used to make direct investments in US companies.
This can be done by purchasing the companies’ assets (stock), or by lending it out in the form of interest-paying financial instruments, like corporate bonds or in the sovereign debt of the nation. Foreign investment in US companies by either buying assets or lending assets to American businesses allows these American companies to create jobs that pay the salaries of their employees. If the investment pays off in higher stock prices or higher dividends, this creates, even more, surplus US dollars.
By contrast, investments in our sovereign debt are currently being used to fund most government consumption in the form of government subsidies and handouts used to buy votes. Therefore, having a trade deficit is like debt. It can be a good thing if the money is used for investments, but it can be a bad thing if it is used to support greater consumption.
How can you use your knowledge of trade surpluses/deficits to chart a better course for your small business?
