Does a Trade Deficit Imply Trade Debt?

Don Boudreaux has written on this topic numerous times, including at his Cafe Hayek blog today: https://cafehayek.com/2024/01/discoursing-on-trade-deficits.html

Like the USG debt, many people taka an alarmist view of trade deficits.  The pushback in this post is well taken.

Nevertheless, one can ask if the levels of USG defects and trade deficits are optimal.   While I know of no criteria to judge whether are trade deficit is good or bad, there is for the USG deficit.  There I’d say if the deficit arises from expenditures with NPV =< 0, deficit is too large by that amount.  Of course if there are expenditures with NPV > 0 that are not made, then the deficit is too small.  On the taxation side, the rule would be that the marginal expenditure that the tax prevents also be NPV =< 0. [It is understood that NPV are calculated at MC and MR which could differ from market prices of inputs and outputs and that that MR amd MC include positive or negative externalities.]

Accounting can mislead to many with regard to what is really going on with economic activity, and economic exchange.  Trade is one problematic area which due to accounting allows for Pols to distort and many in the public to buy in to views that are incorrect.  Additionally the old accounting identity of C+I+G+(X-M) is also misunderstood by a great many.

So the question is this: Why has accounting for economic activity not changed to better reflect the underlying activity of exchange that takes place?

David, I agree with your observations and wonder if you might have a critical opinion on the 2014 IMF changes in Balance of Payments terminology in which the old “capital account surplus” is now characterized as “net borrowing.”

In 2014 the IMF completely revamped the presentation of balance of payments accounts. Items for which transactions represent the exchange of cross-border claims on future income beyond the current year, that were previously grouped into the “capital account,” are now dubbed the “financial account,” and net acquisition of financial assets in these accounts is indicated by positive entries (not negative entries indicative of “capital account deficits” as before. What is more, the net balance of the summed financial accounts (called the “investment position”) is described by the IMF as “net lending” or “net borrowing.” In the 2014 revisions, capital transfers are grouped into an account now called “the capital account,” bearing no relation to the old “capital account.

From the IMF Balance of Payments and International Investment Position Manual, Sixth Edition, (https://www.imf.org/external/pubs/ft/bop/2007/pdf/bpm6.pdf)

133: “The overall balance on the financial account is

called net lending/net borrowing. Net lending means

that, in net terms, the economy supplies funds to the rest

of the world, taking into account acquisition and disposal

of financial assets and incurrence and repayment of liabilities.

(Net borrowing means the opposite.) Despite the

lending-oriented terms, net lending/net borrowing is a

balance that takes into account equity, financial derivatives,

and monetary gold, as well as debt instruments.

Also, net lending includes reduction of liabilities and

net borrowing includes reduction in assets.”

My defense of this nomenclature (from my book The Japanese Economy, 4th ed, p. 189): “The financial account items (like the old capital account as it was once dubbed) include all financial instruments—loans, trade credit, currency, and securities of all kinds, including not only stocks and bonds but also financial derivatives such as swaps and stock options. More than that, the financial account items also include some real assets such as real estate or factories, the ownership of which entails a right to a future cross-border stream of income or services. If a resident buys a factory in a foreign country from a nonresident, she is acquiring an entitlement to the future stream of dividends from profitable operation of the factory. The acquisition of the factory is in that sense equivalent to net lending by the resident to the nonresident from whom the factory was purchased—paying something now in return for a promise of receiving a stream of payments in the future.”

Ｄavid, has the IMF stoked confusion? Or is the new terminology acceptable? I am on the fence myself.