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In this week’s episode, Devin and John chat with David Stein, host of the Money For The Rest of Us podcast. Today David will explain the importance of trade, and what trade and trade wars might mean for you.
Trade Deficits and Trade Surpluses
Fundamentally, trade is a good thing. That’s part of our economic system. The problem arises when it is made too simple, and people cheat, and it is unfair. There have been times where it has been unfair, particularly with China, where they have deliberately kept their currency weak relative to the dollar, so that their products are cheaper than they would be.
David explains that there are two sides of each trade exchange: someone in another country buys a good or service from the U.S., and money is exchanged for that. There are two different transactions occurring together. So, there’s always the actual product, called the trade deficit or surplus, or the money, called the capital account. Those two things have to equal out.
When thinking about trade, most folks think about the physical goods and services, and people get concerned because we have a trade deficit. But it is important to understand the money side, too. If that country sells that product to me, they now hold a dollar bill that I gave them. They can either convert it into their own currency, or they can invest that dollar into an investment in the U.S..
Keep in mind, it isn’t always the flow of goods and services that leads a trade deficit. In the stereotypical transaction, someone in the U.S. purchases a good from another country, and sends our money to that country. Then, that country has U.S. money to spend. But a trade deficit can also start with the flow of money, like when a foreign company decides to invest in the U.S.. They are converting their currency into dollars, to invest in the U.S., now we have all this foreign money in our financial systems, which makes it possible to buy those goods and services.
The Current Situation
There is a law that gives the President the right to take action on trade if it impacts national security. In the recent news, the President imposed new tariffs on aluminum and steel.
90% of aluminum used in the US is imported. Aluminum is used in defense products, so if we don’t take action somehow to support the aluminum industry, then that could be a national defense industry.
The steel industry is very different. We only import about 30% of our steel, so it’s not an issue of national defense. The loss of jobs in the steel industry isn’t actually the result of us importing too much steel, but rather because the steel industry has become very efficient.
The concern is that other countries will respond to our new tariffs with their own new tariffs, and that trade will be disrupted. Devin asks David, “Would you recommend to your clients that they take any action based upon anything that’s happened so far?” David says no, not at this point. He monitors the economy to see where it might be going. If the leading economic indicators start showing signs of impact, then perhaps it would be time to consider some changes. But now, it is too early to tell.
- Is a trade deficit funded by “Monopoly money?”
- Who actually tracks trade?
- How your vacation might create a trade deficit
Resources mentioned in this episode:
You can find David at the Money for the Rest of Us podcast.
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