E Trade Deficits, Trump Tirades, Paris Accords

With Donald Trump facing government and media pressure for his unusual behavior in Europe as well as with the ongoing Russian probes, we at least can interpret his views about Germany and the Eurozone and regarding the Paris Accords on climate change. It is possible to see where he is right and where he is wrong, and where he has no solution other than what could be considered a hostile act. 

Donald Trump is partially right about Germany. Germany does use the Euro as a hammer to increase trade. If we were dealing with the German Mark, it would be stronger than the Euro, and Germany would not be able to dominate trade like it does. 

However, there are other issues at work with the German trade deficit and with trade deficits in general that make the issue more complex. Asset prices and inflation are affected by trade policy. There are pros and cons to US running trade deficits.

But before going into that discussion and into discussing the Paris Accords, here is a definition of balance of payments and the short and long term effects:

A balance of payments deficit means the country imports more goods, services and capital than it exports. It must borrow from other countries to pay for its imports. In the short-term, that fuels the country's economic growth... ...In the long-term, the country becomes a net consumer, not a producer, of the world's economic output. It will have to go into debt to pay for consumption instead of investing in future growth. If the deficit continues long enough, the country may have to sell off its assets to pay its creditors...

The US trade deficit with the world, for goods only, was 750 billion dollars in 2016. However, the US also exports services. The trade surplus for services was 248 billion dollars, cutting the total trade deficit to 502 billion dollars.

Almost 1/2 of the trade deficit is with China. The German trade deficit in 2016 was 63 billion dollars.

Zachary Karabell made the case back in 2014 that IPhones add 6 to 8 billion to the trade imbalance with China, but that each IPhone only leaves $10 for the Chinese economy. Most parts are made elsewhere, and the design is done in the United States. He is arguing that the trade deficit with China is not as bad as it looks.

Clearly, the benefits of trade deficits come to the United States in two ways.

1. First, the design of the product and some parts manufacturing is located here.

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Disclaimer: I have no financial interest in any companies or industries mentioned. I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice. The ...

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