The Cato Institute‘s Dan Griswold is one of the most astute trade analysts working today. Here’s his outstanding post today, on the trade deficit, at Cato’s blog. I especially like this paragraph:
According to the basic rules of supply and demand, the surplus of
global savings flowing into the United States each year to finance the
trade deficit puts downward pressure on U.S. interest rates. A new study
from the National Bureau of Economic Research, “International Capital
Flows and U.S. Interest Rates,” by Francis Warnock and Veronica
Warnock, confirms the positive effect of international capital flows on
long-term U.S. interest rates. “Large foreign purchases of U.S.
government bonds have contributed importantly to the low levels of U.S.
interest rates observed over the past few years,” the authors
concluded. Specifically, they found that current inflows of foreign
capital reduce long-term U.S. interest rates by about 100 basis points,
or one percentage point.
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Okay, but what happens when those countries who have a huge trade surplus with us start down a different path because they are a bit nervous about too many of their eggs in our basket?
http://yahoo.reuters.com/news/articlehybrid.aspx?type=comktNews&storyID=urn:newsml:reuters.com:20061110:MTFH82714_2006-11-10_18-03-04_L10113345&pageNumber=0&imageid=&cap=&sz=13&WTModLoc=HybArt-C1-ArticlePage3
Since Japan, China, and Germany have large trade surpluses, does this mean their interest rates have gone up?
Norway has a 20% trade surplus. Is it good, bad, indifferent?
Dan Griswold writes:
"Almost all those dollars come back to the United States to buy U.S. assets — real estate, stocks, corporate and Treasury bonds, and bank deposits. In other words, they invest those dollars in America.
"According to the basic rules of supply and demand, the surplus of global savings flowing into the United States each year to finance the trade deficit puts downward pressure on U.S. interest rates."
Later he writes:
"If you are among the tens of millions of American families that are paying off a home mortgage, you can thank the trade deficit and the offsetting foreign capital surplus for saving you thousands of dollars a year in interest payments."
Okay. But what he doesn't mention is that foreign investors buying U.S. assets must, ceteris paribus, drive up the prices of those assets. It would therefore be equally true to say that "If you are among the American families looking to buy a house or an apartment, you can curse the trade deficit and the offsetting foreign capital surplus for driving up the price of homes."
Mark Brady,
Can you quantify the amount that the price of homes has risen due to the incoming capital? Griswold says Interest Rates are up to 100 BP lower; do your figures indicate the rise in Real Estate prices completely neutralize or overcome the benefit of the 100 BP?
I would naively guess that the proportion of foreign to domestic purchasing of US Bonds is higher than the proportion of foreign to domestic purchasing of American housing. But I may be completely wrong.
python:
I'm not an econometrician and, even if I were, I don't have the time or the data to answer your question.
I think your "naive guess" is probably correct. But even if it is, note that other American residents lose out in one way or another, e.g., savers lose out in that they receive a lower rate of return on their investments. That said, I had a larger point in mind when I made my initial post. There are good and bad arguments for free trade and free movement of capital. The sort of argument Dan Griswold used (pointing to benefits enjoyed by particular people) is susceptible to being countered by comparable arguments that point to harms suffered by other people. The case for free trade and free movement of capital cannot and need not rely on that approach.
Mark,
I disagree that the benefit to some is not a valid argument for free trade. It is our nature, and a good thing, to cooperate for mutual benefit.
I also disagree that the harm done to others is a valid argument against free trade. Primarily because its not an intentional harm (I have no intention of harming Walmart when I shop at Target, or of harming Ford when I buy a Jeep), but also because competition is of great value to society. The argument against harm is really an argument against competition.