There is no real reason for the policy makers of a nation to worry about bilateral trade deficits.
After all, I have a gross trade deficit with my barber. I buy haircuts from him regularly and he never buys anything from me.
I sell internet content. My barber has little reason to buy internet content. His website (if he even has one) would be a quite modest affair with no need for the product of my blood and sweat.
Yet this deficit is sustainable -- there is no need for me to shed tears over it.
What might be of concern is a global trade deficit. When what I sell to the world as a whole is of less value than what I buy from it, I am in an unsustainable position. The point, still, is that bilateral thinking doesn't help us address that situation.
Just as some people make the mistake of worrying about bilateral trade deficits, others make the mistake that believing that such a deficit is a source of strength, of leverage. "I pay my barber a lot of money if we annualize it -- he'd be really sorry to lose me -- so he'd better do as I say about [insert subject other than hair cut quality or style here.] The fact is, I have no such leverage. If he's a good barber. he'll find other customers, and they'll put up with his idiosyncratic wall decor or whatever it is that drive me away.
Where am I going with this?
The truth is I'm still thinking about Prez Trump's speech mid-August about Afghanistan, and in broader terms about south Asia as a theater.
Trump's speech said that India gets billions from U.S. purchases, and that as a result the U.S. can appropriately demand that India step up and accept a greater share of the burden of anti-terrorist efforts in the region.
In fact the U.S. goods trade deficit [leave out services trades for now -- for a reason I'll get to in a sec] with India in 2016 was $24 billion. US sellers sent India's way $24 billion less of tangible things than US buyers received from there. That makes India the barber in my humble example. It's getting mostly money from us, we're getting stuff from it (diamonds, textiles, machinery, etc.)
Does this mean that we can boss them around? Not very effectively, no. We can threaten to stop buying their diamonds. But there are other non-US buyers, and we'd be cutting off our own nose to no good effect.
The thing about goods rather than services, diamonds rather than haircuts, is that they're readily transferable to third parties. Someone in France can buy Indian diamonds and sell them to Americans. And diamonds are fungible -- there is no discernable property of an "Indian diamond" once it is in world trade. So this idea of using our bilateral trade deficit as leverage gets to look silly pretty quickly, especially when goods are concerned. So long as they continued to contribute to the world's supply of the stuff, and we continued to contribute to the world's demand, we'd still in rough effect be buying their diamonds. (Diamonds "in the rough," get it?)
Services that cross national borders, and oceans, don't necessarily pass through third parties in the way diamonds do. If I do break things off with my barber I'm not going to be getting haircuts from a guy who still gets haircuts from him, in the way in which I can buy the diamonds from the continued patrons of my old diamond merchant. And India famously does provide the US with services -- think of those call centers, for example, to which I would make resort if this laptop weren't working! What happens if Trump tries to leverage the services portion of our trade deficit with India by cutting THAT connection?
Well, nothing good, although the analysis is a tad more complicated here.
But, hey, Trump can now say he has an Afghanistan and/or a South Asia policy. He gave a speech on it and everything.
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