Home > Uncategorized > Graph of the day 2. How to understand bilateral trade balances.

Graph of the day 2. How to understand bilateral trade balances.



Today: 2 graphs. And do I really have to write this blog? Yes, I have. At this moment the USA government seems to target bilateral trade balances: these should be more or less balanced. To quote a Trumptweet (January 27, 2017): “The U.S. has a 60 billion dollar trade deficit with Mexico. It has been a one-sided deal from the beginning of NAFTA with massive numbers…”.  But it does not work that way. Bilateral trade deficits are not the right measure to estimate if trade is one-sided deal. Switzerland is an example.

This landlocked country has a massive current account deficit with the EU (graph above) but a massive current account surplus with the rest of the world. As it imports oil (in fact: oil products) via EU countries which is counted as an import and an export of these EU countries but only as an import of Switzerland. In a ‘real goods’ sense, this is a deficit with oil-producing countries. But we’re not living in a ‘real goods’ world but in a monetary world.  but in a monetary world. As for the US of A: as long as the USA currency is as important as it is now there will be a large demand for US of A money. which means that the USA of A is in fact not lending money to other countries but actually selling money to people abroad who want to store dollars. Which shows up as a deficit on the current account. What a privilege (I first encountered this idea in an article of Cornelis Jepma from around 1985 which I could not trace on the internet – it’s  not really a new insight!). The Vatican sells stamps to cover its current account deficit, the USA sells dollars. And bilateral trade balances are interesting – but not in the way the Trumpistas  think they are. Sources: Eurostat, Tradingeconomics.


  1. March 20, 2017 at 2:25 pm

    Talk about cherry-picking. Switzerland is a bad example. Your argument is valid only “as long as” – if the country has at least a zero overall trade balance, and you know it. The USA has trade deficits with 101 partners and more than half-a-trillion of overall trade deficit. Here Trump is right about Mexico.

    • March 20, 2017 at 6:38 pm

      Trump is both right and wrong. He is right that we need to do something about our trade deficit, but he is wrong to imply that Mexico has benefited at our expense. Mexico was actually hurt far worse than we were, hence the rise of gangs as the national industry. In truth, the rich of both countries benefited at the expense of the poor and of economic growth.

    • merijntknibbe
      March 21, 2017 at 11:51 am

      The example is of course somewhat cherrypicked, but it does serve to show that bilateral trade deficits are not necessarily a problem. .I do not know enough about the USA-mexico situation to have a clear opinion about it.

  2. March 20, 2017 at 2:47 pm

    And selling dollars is not selling stamps. You have to buy dollars back – to pay with your wealth. China buys American companies for dollars. It buys armaments. It was a silly argument in 1985, too. Strange to hear that from you.

    • merijntknibbe
      March 20, 2017 at 3:00 pm

      If a country dollarizes, even if it is only to a limited extend, this is a HUUUGE seigniority profit for the USA.

      • March 20, 2017 at 8:44 pm

        Are we talking apples and oranges here? I respect merijntknibi’s work and prior postings and I think Mr. Masch’s tone is a little harsh, but am I missing something, a word or phrase or and idea? Can someone help clarify?

      • March 20, 2017 at 8:58 pm

        Friedman had this argument too – can Japanese eat dollars? No, but the USA lost in less than two decades about 12 trillions of wealth. Maybe somebody profited – weak consolation.
        (And “seigniority” has no definition in English – looked at many places. What does it mean?)

      • March 20, 2017 at 10:18 pm

        That is the problem: I respect his work too, in contrast to MF.
        But I do not like sophistry that contradicts simple horse sense.
        A Chinese billionaire responded two years ago to both of them as follows:

        “We have bought their buildings, we have bought their companies and now we are going to buy their art.” Did the USA have HUUUGE profit?

        And Chinese military budget grows annually in two-digit percentage range. Geopolitics first.

  3. March 20, 2017 at 6:43 pm

    It is funny that dollarization wasn’t an obstacle to balanced trade in the US before Reagan passed Reaganomics, as I expect that using dollars was actually even more popular back then. I think a better explanation for our trade deficit that remains after you factor out issues like China forcing itself to be at a surplus with the world is the growth of Assets in the US. Clearly “greedy consumers” doesn’t hold water given the strong dollar, but “greedy foreign investors” seems entirely plausible to me.

    Disclaimer: I haven’t actually checked the numbers for dollar conversions and could very well be wrong about this.

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