On U.S. Trade Deficits and Global Demand for U.S. Dollars

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In my latest column for AIER I explain the inconsistency of Trump’s desire to reduce U.S. trade deficits with his desire that the U.S. dollar remain the global reserve currency. A slice:

Yet despite economists repeatedly offering empirical evidence showing that trade deficits do not negatively affect employment, wages, economic growth, or any other measure of economic performance, Mr. Trump’s determination to end trade deficits is unshaken — and polls show that a majority of the public shares his concern with these deficits. This attitude is unfortunate, as the problem with the president’s war on trade deficits goes beyond its inconsistency with the empirical record; the problem includes its inconsistency with some of his own policy aspirations.

Earlier this month, Mr. Trump again emphasized his desire that the US dollar maintain its status as the global reserve currency. In addition, the White House boasts about the many additional investments that his policies are prompting multinational corporations to make in America. As a simple matter of economic logic, however, if foreign governments, firms, and private citizens continue to rely on US dollars as reserves, as well as if foreigners increase their investments in the US, Mr. Trump’s goal of eliminating US trade deficits becomes impossible to achieve.

Any dollars that foreigners hold as reserves, use to conduct international commercial transactions amongst themselves, or invest in America are unavailable to be spent on American exports. These uses of dollars thus result in US trade deficits. And the more intense are foreigners’ demands for dollars as reserves or to invest in America, the larger are these trade deficits.

It’s disturbing that the president is unaware of this necessary connection between US trade deficits and foreigners’ demand for dollars as a reserve currency or as an investment vehicle. He doesn’t realize that if US trade deficits are to be eliminated, foreigners must be persuaded, period after period, to spend on American exports all of the dollars that Americans send abroad as payment for US imports. Only then will the value of our exports equal the value of our imports. But the elimination of US trade deficits, by preventing all uses for dollars other than to purchase American exports, would also end the dollar’s run as a reserve currency, as well as reduce global investment in the American economy.