There is no danger of the U.S. being unable to finance trillion-dollar trade deficits in the next few years. But for how long?
U.S. Bureau of Engraving and Printing building in Washington, D.C., an agency of the Treasury Department that prints paper money for the U.S. Federal Reserve. (Smash the Iron Cage/Wikimedia Commons/CC BY-SA 4.0)
By Craig Murray
CraigMurray.org.uk
There is a giant problem that commentators are ignoring. The United States’ trade deficit is of incredible proportions and is only sustainable because the dollar is the world’s reserve currency – a status it is going to lose.
The U.S. trade deficit in 2024 was approximately $1.2 trillion. Gross Domestic Product was approximately $30.1 trillion. That’s a trade deficit of an eye-watering 4 percent of GDP. By contrast, the EU had no significant trade deficit as a percentage of GDP. Zero. Even the chronic U.K. trade deficit was only 2.2 percent of GDP.
Does it matter? Well, historically not much.
The U.S., as the world’s reserve currency, has been able simply to create more dollars through bonds or quantitative easing to finance its trade deficit. Nobody — including the U.S. Federal Reserve — really knows how many dollars exist in the world. On the wide M3 measure of money supply — encompassing cash, bank accounts, government bonds and all other instantly convertible dollar-denominated instruments — it is believed there are about $21 trillion in the world. (This is a measure of money, not of assets such as property and shares).
Nobody knows how much of this money is held outside the United States; about 65 percent seems a broad consensus but you can find estimates from reputable institutions ranging from 45 percent to 75 percent.
Because the U.S. has the world’s reserve currency, which is essential to trade, at least half and probably most dollars exist outside the U.S. economy. That is what is unique about having the world’s reserve currency. It means nations will always be willing to borrow more money, which you have just created, to finance their purchases of oil, grain and other essentials and luxuries.
What prevents governments in general from just printing more money is fear of inflationary effects by devaluing the currency (though the notion that this is a simple relationship is less prevalent now than at the height of monetarism).
However, the unique advantage of the United States is that any domestic inflationary effect from creating more dollars is effectively buffered by the fact that most dollars are not in your economy: they are in other people’s economies, or sitting in overseas reserves. You can thus create dollars without creating much domestic inflation.
So it is great to have the world’s reserve currency. There is no danger of the U.S. not being able to finance trillion-dollar trade deficits in the next few years. But for how long?
Waning Confidence
China’s leader Xi Jinping and Poland’s President Andrzej Duda during the inauguration of the China Railway Express in Warsaw, June 20, 2016. (Andrzej Hrechorowicz /Kancelaria Prezydenta RP, Wikimedia Commons/CC BY-SA 4.0)
What the trade deficit actually is, in practice, is the world giving the U.S. astonishing quantities of very real goods in exchange for some transferred data or bits of paper. That depends on a confidence which is waning.
In the simplest of terms, in 2000 the U.S. had approximately 30 percent of world GDP and China approximately 4 percent. Now the U.S. has approximately 26 percent and China approximately 18 percent. In manufacturing, China has overtaken the U.S.
Attaining world reserve currency status ultimately depends on trust around the globe that your currency represents the best store of value. It is a status essentially linked to economic performance.
Famously, nations which moot using other currencies than the dollar for trading, particularly in oil, are immediately targeted for regime change.
[See: What Hillary Knew about Libya]
This represents a realistic appraisal by the U.S. of the importance of retaining its global currency status. In time, people and institutions are simply going to want to hold yuan not dollars. The dollar-oriented Bretton Woods institutions are already losing ground to Chinese finance in importance to development in the Global South.
Proposals such as a BRICS basket of currencies for trade are only symptoms of the coming change; the configuration of institutional and trading arrangements as the dollar loses its dominance do not affect the big picture.
How crypto will ultimately fit in with the governmental systems is a very large question. If it does have a significant role, that too can only be a threat to the dollar’s necessity for trade.
To circle back, the U.S. cannot enter the period of loss of reserve currency status with this level of trade deficit. Whether Trump sees this, or is rather fixated on the social effects of globalisation and the gutting of manufacturing in Middle America, I do not know.
Manufacturing Capacity
Long Hau Industrial Zone, south of Ho Chi Minh City. (Luongviethoang.hcm/Wikimedia Commons/ CC BY-SA 4.0)
Leaving aside the total chaos of Trump’s on/off tariff implementation, I do not see how Trump’s policy can succeed. The difficulty is that America’s manufacturing capability has been destroyed. There are no great rows of blast furnaces sitting there just waiting to come back on and replace imported steel.
Take the cotton industry, once massive in the U.S. The 46 percent tariff proposed on Vietnam and the 37 percent on Bangladesh relate primarily to imports of clothing. The cotton textile industry is a fine example of the effects of globalisation.
Levi Strauss, Fruit of the Loom, Hanes and Carhartt outsourced their factories to Latin America and Asia, almost entirely ending U.S. production. American Apparel tried to hold out, but went bankrupt in 2015 and now produces largely overseas. Only niche production (organic or upmarket) remains.
Garment factory in Sangkat Chaom Chao, Cambodia, 2016. (UN Women Cambodia/Charles Fox/ CC BY-NC-ND 2.0)
This has happened since the 1990s — Levi Strauss & Co, for example, stopped all U.S. manufacturing in 2003. Entire cities were devastated. The Amalgamated Clothing Workers of America (ACWA) union folded for want of members.
But can the clock really be turned back? The factories are gone. Will sticking a 46 percent tariff on Vietnam cause Fruit of the Loom or Levi Strauss to return manufacturing to the U.S., or will it just make clothes more expensive in the U.S.?
That might itself reduce the trade deficit by causing people to buy less clothes. But for cotton manufacturing to return to the U.S., entailing massive investment, companies would have to be certain the tariffs were permanent. That appears to be the least likely obstacle to overcome. Tariffs would also have to be sufficiently high to overcome the difference in labour costs; that is dubious.
The U.S. is still a massive exporter of cotton, in large part to those countries where it is manufactured into textile and sold back to the U.S. Whether there is a labour force inside the U.S. waiting to work in textile and clothing factories I am less sure. Insofar as there is, I suspect Trump is trying to deport it.
I have just taken cotton as one example, but import substitution is much more difficult to achieve than to say. I am not such a fan of globalisation that I automatically decry tariffs. I enjoy cheap Chinese electronics and inexpensive underpants as much as the next man, but the profits have disproportionately gone to the billionaire class while working class manufacturing communities have indeed been devastated. But you can’t run an economy on nostalgia.
Trump’s tariff policy has been astonishingly chaotic and is not well articulated. But the underlying dynamics are worth study beyond mockery, and the problem he is seeking to tackle is very real indeed. Those viewing Trump’s proposals as a joke need to say what they would do about the U.S. trade deficit.
Because the world is not going to supply them with cheap goods forever.
Craig Murray is an author, broadcaster and human rights activist. He was British ambassador to Uzbekistan from August 2002 to October 2004 and rector of the University of Dundee from 2007 to 2010. His coverage is entirely dependent on reader support. Subscriptions to keep this blog going are gratefully received. Because some people wish an alternative to PayPal, Murray has set up new methods of payment including a GoFundMe appeal and a Patreon account.
This article is from CraigMurray.org.uk.
Views expressed in this article and may or may not reflect those of Consortium News.
“The United States’ trade deficit is of incredible proportions and is only sustainable because the dollar is the world’s reserve currency – a status it is going to lose.” Craig Murray
…… No doubt, POTUS’ 42-47 will be long gone!!! Just like “The Golden Age.” That period, before NAFTA, CAFTA, GATT, the General Agreement on Tariff & Trade; AND, SHAFT-YA eliminated, decimated, blew a f/hole in “the great happiness, prosperity, achievement, success,” right through the heart, of the USA’s “working” partner$hips between Employers & Employees, in American MANUFACTURING. “Made In The USA!!!”
“Manufacturing,” was “a golden age for our country.” It’s GONE! “Done & Dusted. Craig Murray’s on the monies, “Whether there is a labour force inside the U.S. waiting to work in textile and clothing factories I am less sure. Insofar as there is, I suspect Trump is trying to deport it.” Craig Murray.
…. “Labor was the first price, the original money that was paid for all things.” Adam Smith.
No doubt, “The Gemini’s,”#47’s, $cheme, “the total chaos of Trump’s [ON/OFF] tariff implementation,” triggers the Universe. “Not Good. Buhlieve, Me. Not Good!”
“[HOW can] Trump’s policy succeed? The difficulty is that America’s manufacturing capability has been destroyed. There are no great rows of blast furnaces sitting there just waiting to come back on and replace imported steel.” Craig Murray.
…… And, it brings us back to “dough,” my dear. Su$tenance!!! The USG “banks on & off of,” 1) the US’ National $ecurity aka the M.I.C.; &, the U.S Treasury; 2) The US’ National Intere$ts aka US’ Corporations; &, 3) The National Currency aka USDollars.
….. “[BUT], you can’t run an economy on nostalgia,”Craig Murray, i.e., “Individual Ambition Serves the Common Good.” Adam Smith.…… “The great virtue of a free market system is that it does not care what color people are; it does not care what their religion is; it only cares whether they can produce something you want to buy. It is the most effective system we have discovered to enable people who hate one another to deal with one another and help one another.” Milton Friedman
No doubt, the “American Dream” is dead! “Sadly, the American dream is dead. But if I get elected president, I will bring it back bigger and better and stronger than ever before, and we will make America great again.” DJ Trump
… “If you put the federal government in charge of the Sahara Desert, in 5 years there’d be a shortage of sand. “ Milton Friedman
TY, Craig Murray, CN. Keep It Lit! TY.
Thanks for the latest info Craig. Those of us who have been watching these things for the last fifteen years or so know and understand the issues, especially that this must stop.
A great place to start would be taking the check book from himself. He needs to go and the republicans own this issue, the democrats are next in the blame column and voters follow.
You cannot make this stuff up.
This is a better explanation of the monetary situation than I have read elsewhere, so kudos to you, Mr. Murray.
I think Trump’s trade policies are of a piece with his foreign policies. He knows America can’t compete with foreign manufacturing. America’s trade deficits constitute a sort of tribute. Other countries must pay to trade. He is demanding more tribute than was agreed. Those who won’t pay this increase in tribute will be progressively cut off. Any who try to set up a rival system will be attacked militarily. It’s a thickly gloved iron fist.
I agree this will change, but given the military might of America, it’s not clear in which direction the change will be. Trump’s openly declared return to imperial expansion is a warning that force will be used to increase America’s wealth and stop rivals from besting it economically. The likely result is the breakup of the world into pro and anti-American blocs. After that, together with the apparent intention of America to back Israel’s deportation of much – or all – of its Arab population and yet further expansion of occupation of Arab lands, the stage will be set for another world war. About the only questions are: what will America’s rich allies – such as Europe and Japan – do? and how closely will the anti-American bloc cooperate?
To be clear, I am a fan of Globalization. I am an opponent of Corporate Globalization, which is what the world has been seeing since Bill Clinton was President.
To avoid the capitalists constantly driving a race to the bottom in everything from the environment to pay and working conditions, we need some sort of Globalization to set a floor on how low the capitalists are allowed to go. What we do not need and can not do well in is a world where the Globalization is by the corporations and for the corporations as Bill Clinton designed it.
We need unity and solidarity, and we need it across the world.
Even if America had rows of blast furnaces sitting ready to be fired up again …. they’d be old and very out of date. That was the crisis the Steel Industry had been facing when it began to move overseas. That America’s mills and foundries were old and that the capitalists had been making profits by cutting costs, and delaying investments in new equipment, so there was a massive bill due for “modernization.” That was when the capitalists, the CEOs and Boards of Directors, decided to make their investments in new equipment in overseas mills and foundries. They put profits over both patriotism and giving a dang about working Americans. Today, it is a sure bet that they still only care about profits and still don’t give a dang about Americans.
One other factor. America has been operating a Brain Drain on the rest of the world for decades. If you attend the graduation ceremonies of a good technical university, you will notice that most of the advanced degrees do not go to people named “John Smith.” And yes, in an immigrant nation, one can not go by name alone. My name would place me more in France than being from Appalachia. But, still, it was rather obvious and has been for decades that the USA has been sucking in talent from the rest of the world. Some of it then goes back home, but some of it stays in America.
Trump, through his belligerence and hate, is driving people away. A headline today speaks of the $billions to be lost in the tourist trade as the rest of the world seems to increasingly view a trip to America as about the same as going to Germany in 1938. Trump is also openly declaring war on foreign university students. Think of the message that is sent when people find their student visas cancelled and them put on a plane and deported. That message goes around the world in this age of light-speed communications. One can picture parents around the world having serious talks with their children about whether they really want to go study in America. And the result will be that the Brain Drain from the rest of the world that has been powering American tech is going to end, if not go into reverse. I know my advice to a bright young American would be to head west until they reach China.
So, not only will America have to figure out how to re-industrialize. It will have to do it without the existing base of knowledge of engineering and management about how to build and run a factory. That knowledge left with the factories, it had to, as those jobs follow the factories. And, America has to figure this out with the supply of Brains from the rest of the world now either cut off or severely limited to people with blonde hair and blue eyes.
‘ A 2024 video of Tim Cook has resurfaced, providing insights into Apple’s manufacturing choices amid the ongoing U.S.-China tariff war. In the video, posted on X by CNBC TV18 reporter Nigel D’Souza, Cook dismissed the idea that Apple’s manufacturing in China is due to low labor costs, stating, “China stopped being a low labor cost company many years ago.”
Instead, he emphasized China’s unparalleled skilled labor concentration in one location and advanced tooling capabilities as the primary reason. Cook emphasized that “the products that we do require truly advanced tooling.”
On that note, Cook emphasized the sharp difference in vocational skills between the US and China. The Apple CEO stated, “In the US, you could have a meeting of tooling engineers, and I’m not we could fill the room.” In China, however, “you could fill multiple football fields…. Hence, the vocational expertise in China is very deep”. ‘
Yahoo Finance, When Apple’s Tim Cook Revealed The Real Reason iPhones Are Made In China—And It’s Not ‘Low Labor Costs’: ‘China Stopped Being A Low-Wage Country Years Ago’
Thanks Craig – some useful figures – thanks…