Sunday, 5 February 2017

The disadvantage of trade deficits

I don't subscribe to the mercantilist "imports bad, exports good" world view, but this comment by Dinero a couple of days ago is not quite correct:

It's worth noting that the partner that is running a deficit in bilateral duoploist trade partnership is the one that is running an advantage as they are receiving goods in return for IOUs.

I explained the downside of the UK's trade deficit (from the UK populations point of view) here.

The UK's trade deficit is about £100 billion a year. What do the foreign exporters do with the GBP they accumulate? They like buying up things in the UK which will provide rental/super-profits/unearned income: shares in UK companies, commercial land and buildings, 'privatised' utilities, high-end London residential, student accommodation and things that will entitle them to government-guaranteed payments (Sizewell B, farmland, UK government bonds etc.

This is a vicious spiral of course. Every year the UK as a whole is poorer by the amount of rent which seeps abroad, enabling foreigners to buy more UK rental streams ad infinitum...

As ever, this is a job for LVT-Man:

So what would happen if we got rid of these subsidies; started taxing rents/monopoly income more and production/wages less; and reduced public sector deficit to zero? Foreign manufacturers and farmers will still be happy to sell us stuff, they are geared up to producing and selling as much as possible.

What will they do with the GBP they receive for what we import? They are welcome to buy land, but most of the value will go back to the UK Treasury as tax instead of seeping abroad as rent. So they will spend much more of their GBP on UK produced goods and services. Or maybe they will sell us less stuff while buying the same amount from us. Either way, it would do wonders for the balance of trade.


Steven_L said...

Edinburgh on 27th March? I think I'll come along. Is it a flying visit or are you staying for the weekend?

Mark Wadsworth said...

SL, it's a day trip.

Steven_L said...

Looks like I'm going to have to make a weekend of it with her indoors and her mother. Not allowed out on my own. I doubt they'll bother to attend your talk though.