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Warren Buffett Was Wrong - Trade Deficits Don't Matter

Jun. 15, 2020 7:30 AM ET15 Comments
Tim Worstall profile picture
Tim Worstall


  • It's a common enough theme, that the American trade deficit tells us something important about the American economy. This is false.
  • Both Warren Buffett and Robert Lighthizer - who is the current Trade Representative - insist that this deficit does matter. They are both wrong.
  • We can show this by looking at the household accounts for the US as just published. Disregard the deficit as a useful indicator of the economy or investment patterns.

It's a common complaint

That we buy more from foreigners than they buy from us isn't actually something true. Nor even possibly true. However, we do divide the trade accounts into two parts, the current account and the capital account. It's entirely possible for us to buy more on the current, they to do more on the capital, account. This is often worried about under the general rubric of the balance of trade. Adam Smith told us there was little more ridiculous than worrying about this and this has become ever more true since his day as we have floating, not fixed, exchange rates today.

That this is all something not to worry about means we should pay little to no attention to market movements caused by people worrying about it. Even, trade against the movements caused by those worries. True, this is rather more a long term point than an immediate trading opportunity but it is still one worth understanding.

The trade deficit

We can see in the current politics that many do worry about the trade deficit. The President for example. It's also true that unions are rather against it, their power being concentrated in manufacturing - in the private sector at least - and it's manufacturing where the deficit bites hardest upon domestic employment.

The problem with the formulation is that it simply doesn't matter. So, we buy more goods and services from foreigners than they buy from us. And?

Some then say that we must borrow to pay that bill and that means that in the end disaster will strike. For at some point we've got to repay the borrowings. This is not true, we do not borrow to cover the trade deficit. Instead, the balance of payments always balances - that's why it's called the balance. If there's a deficit on the current

This article was written by

Tim Worstall profile picture
Tim Worstall is a wholesaler of rare earth metals and one of the global experts in the metal scandium. He is also a Fellow at the Adam Smith Inst in London and an writer for a number of media outlets, including The Times (London), Telegraph, The Register and even, very occasionally indeed, for the WSJ. This account is linked with that of Mohamad Machine-Chian: https://seekingalpha.com/user/52914142/comments

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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