The Dark Matter of Trade

At the core of the problem are two questions: whether the United States has a trade deficit, and, if so, what to do about it. The Trump administration says the US does have a deficit, and that the solution is an easy-to-win trade war.

Economists tend to dispute Trump’s answer to the second question. They argue that external imbalances are the reflection of domestic imbalances. In every transaction, what one party calls spending, the other calls earning. So, the sum of all market participants’ earnings must equal their total spending. But if you divide the world into two types of people – residents and non-residents – then the only way that non-residents can earn more than they spend in your country is if the residents are spending more than they earn. So external deficits reflect residents’ spending in excess of income – in which case the problem will not go away through a trade war, unless it forces residents to spend less, by, say, taxing them with tariffs. But the government is doing everything it can to achieve the opposite: it is lowering taxes and increasing spending by record amounts, thus aggravating the imbalance. Trade policy is not the answer to trade deficits.

But the first question remains: Is there a trade deficit to begin with? Is the plane heading down, requiring action? This ends up being a tricky question. Once upon a time, most international transactions involved trade in goods, which are bulky, so it was easy for customs agents at ports, airports, and land borders to report them to the statistical office. In the year to September 2017, the US balance of goods exported and imported recorded a deficit of $789 billion, or about 4% of GDP.

But the problem is that international trade today does not comprise only goods. It also includes services, such as travel, tourism, telecommunications, transportation, insurance, and others. In the same period, the US ran a services surplus of $242 billion, implying that, when added to the deficit in goods, the US is in the red by $547 billion, or 2.8% of GDP. In the case of the bilateral relationship with Canada, including services turns the deficit into a surplus.

There are other corrections as well, like interest and dividends paid and earned, as well as labor remittances. When all of these are included in what is known as the current-account balance, the US had an external deficit in 2017 of $450 billion, or 2.3% of GDP.

The accounting implication of this deficit is that it must be paid either by running down financial assets or by increasing liabilities – that is, by increasing net debt (net of assets). And as the debt increases, interest on it must be paid, leaving less money to spend. If unchecked, the accumulation of debt will sooner or later force an end to the deficit.

From 1999 to 2017, the sum of all the official current-account deficits has amounted to $9.4 trillion. In 1999, the net interest and dividend income of the US amounted to $11 billion. That would be the income generated by a net asset position of $275 billion if we assume a rate of return of 4%. But since then, given the estimated current-account deficit, the US should have borrowed, in net terms, $9.4 trillion. Added to the initial positive net asset position of $275 billion, the US should be in the red for $9.1 trillion. And if we assume that the US borrowed the money at 4%, then it should be paying out $364 billion a year, in net terms, to its foreign creditors.

But the amount the US pays for its supposed $9.1 trillion in net debt is nothing. Instead, it made $208 billion in the year to September 2017, a difference of $572 billion. If that were the consequence of owning some kind of asset that yields 4% a year, it means that instead of owing $9.1 trillion, the US accumulated an asset worth $5.2 trillion. The difference is a whopping $14.3 trillion.

What is going on? Why can the US run a deficit, borrow from the rest of the world, not pay for it, and make out like bandits instead? And what is this weird asset that is worth 73% of GDP?

In a 2005 joint paper with Federico Sturzenegger, the current Governor of the Central Bank of Argentina, we called this weird asset “dark matter.” Like its cosmic equivalent, it cannot be directly observed, but its effects can be felt, not through its gravitational force, but through its financial return. Our work showed that it is mostly coming from the international value of each country’s technology, in ways that are poorly captured by the way the statistics are put together, but it is real. We can see it in the extraordinary value coming from the international activities of Amazon, Apple, Facebook, Google, Hollywood, and Uber, which are poorly captured as exports of either goods or services. It is a financial return to the deployment of technology abroad, a return that other countries actually pay.