April 10, 2025 • 28 mins
Dive deep into the world of trade balances, the role of the US, and the power of the dollar.
The US regularly runs trade deficits with its biggest trade partners, while other blocs such as the EU have trade surpluses. Is this bad for the US, and if so, what can be done about it?
Join Steve Odland and guest Maria Demertzis, The Conference Board Economy, Strategy & Finance Center Leader for Europe, to explore trade balances, why the US dollar underpins global trade, and why the WTO rule book doesn’t
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Steve Odland (00:00):
Welcome to C-Suite Perspectives, a signature
series by The Conference Board.
I'm Steve Odland from The ConferenceBoard and the host of this podcast
series, and in today's discussion, we'regoing to talk about trade deficits.
What are they?
Why are we paying attentionto them all of a sudden?
And where are we going?
Joining me today is Maria Demertzis,the Economy, Strategy & Finance Center
(00:21):
leader in Europe at The Conference Board.
Maria, welcome.
Maria Demertzis (00:25):
Thank you, Steve.
Great to be here.
Steve Odland (00:28):
So Maria, I'm sure our listeners have heard trade deficits
in every media that they consume,but let's just start with the basics.
What is a trade deficit, andhow do they measure them?
Maria Demertzis (00:41):
A trade deficit is, I should say, maybe, a trade balance, it
is the difference between the amountof goods and services that the country
exports versus the amounts of goodsand services that the country imports.
That's the trade balance.
And if exports, the value of exports,is bigger than the value of inputs,
then the trade balance is in deficit.
(01:02):
And if the other way is true, if theexports are bigger than the imports, then
we have what we call a trade surplus.
Steve Odland (01:10):
And so how is this measured?
Is it measured, the governments measurethese things, is there somebody at
the border with an abacus doing this?
How do they literally do this?
Maria Demertzis (01:22):
The technological advancement of an abacus is probably
the right way of describing.
Yes, of course.
I think we mustn't underestimate thetechnology and the meticulousness
with which we measure these things.
National accounts, of which tradebalances are a part, are captured by
the data that comes into the ports.
These are the entry points and, ofcourse, the exit points for our exports,
(01:45):
and all of them are being collected.
Typically, and now I'm speaking forEurope, these are collected by the central
banks, or the balance of payments data.
They're the ones who are collectingthis, and there are very very tight rules
in ways that we are collecting this.
And effectively, what we are measuringin dollar terms or in Euro terms or
any other currency, depending on whichcountry you live, they measure the value
(02:06):
of the exports versus the value of theinputs, and there will be a corresponding
payment that needs to be made.
And that difference in the value will beeither a trade deficit or a trade surplus.
Steve Odland (02:18):
And is this done at the country level or the trading bloc level?
Maria Demertzis (02:23):
So I suppose for the US, it is at the country level, but
also for the EU, which is a tradingbloc, it is done at both levels.
So it is collected at the country level,and it is aggregated also at the EU
level, which is the trading bloc level.
Steve Odland (02:39):
So is the issue then country to country?
So in other words, if the US isrunning a trade deficit with Germany,
is that the issue, or an issue?
Or is the issue reallyversus the US versus the EU?
Just to use an example.
Maria Demertzis (02:56):
Things get a little bit more complicated here.
It really is both of what you described.
There will be a trade balanceposition of the US with Germany
and with France and with Italy.
But there will also be a trade balanceposition vis-a-vis the whole of the EU.
So we will have both numbers, andone is an aggregate of the other.
Steve Odland (03:17):
And which is relevant?
Are both relevant, both the countrylevel and the trading bloc level, or
is one more relevant than the other?
Maria Demertzis (03:26):
It depends what the underlying story is here.
It could very well be that theUS runs a trade deficit with one
country, let's call it Germany.
And that is true, there is atrade deficit, but it runs trade
surpluses with other countries.
Now, I don't actuallyhave the data in my head.
Collectively, the US hasa trade deficit with EU.
(03:50):
Collectively.
But that does not necessarilymean that it has a trade deficit
with every single country.
It's just that when youaggregate it up, it could be a
deficit, it could be a surplus.
Steve Odland (03:58):
And so it depends on, they're both relevant to some extent.
But because the EU negotiates tradeas a bloc, it really is the bloc
level that is the most relevant.
Maria Demertzis (04:13):
I think that's right.
It's a fair assessment.
The trade policy is unique in the EU,as you described, and therefore, to
the extent that you care about how thepolicies may be affecting or not affecting
trade balances, then of course, it willbe the bloc decision that matters, yes.
That's a fair description.
Steve Odland (04:28):
So why does the trade balance between nations or trading
partners, why does this matter?
Maria Demertzis (04:37):
OK.
That is actually a very good question.
And it is, and to an extent the answeris, and I think that's what you're driving
at, but please correct me if I'm wrong,I think you're driving as to whether
deficits are bad and services are good.
Is that necessarily the case?
And I think the answer to that isnot necessarily, it really depends.
So let's go back and lookat what is a trade deficit.
And when does a countryhave a trade deficit?
(04:59):
So if I may start fromthe very beginning.
There is an issueof trade specialization.
So think about German carsversus digital services.
There is an issue of specialization.
Germany tends to produce goodcars that the world wants to buy,
and then the US tends to producegood services or digital services.
(05:22):
You think of the big gaffers,you think of Netflix.
These are all US services, right?
And it is the case thatthere is a specialization.
One does services better, andthe other one does cars better.
So the fact that the two blocs trade, andagain, at this point I'm talking about
Germany versus the US, both benefit.
They benefit from the fact that they havebetter products because they happen to
(05:46):
have a specialization of one product.
So the bilateral tradeposition doesn't really matter.
But if you have one country that hasgot globally a trade deficit position,
then what this means is that this countryimports a lot more than it exports.
That's what a trade deficit means.
So the question that arisesafter that is, can this country
(06:08):
afford to pay for these imports.
And this is, I think, the interestingpart, at least in economic terms.
Can the country affordto buy so many imports and
therefore have a trade deficit?
And the answer to that questionvaries from country to country.
If you're a small country that aims tobuy goods from abroad, you are typically
(06:31):
going to have to pay in the currencyof the bloc from which you're buying.
If you don't have the means to dothat, you will not be able to buy that.
Or if you run a very largedeficit, there will be pressure
on your currency to depreciate.
So is that the story of the United States?
Because the United States havehad deficits for a very long time
(06:53):
and more or less globally, right?
Because the trade balance in theUS has been in a deficit position
globally, meaning with allcountries, for a very long time.
But have we seen pressures onthe dollar to depreciate as a
result of having a trade deficit?
And the answer is no, But why is that?
And here comes and this is an importantdifference, which makes I think the
(07:15):
US unique, and that is the dollar.
The countries that tradewith the US, and not just the
countries that trade, everybody'sinterested in having the dollar.
That means that the US can affordto run trade deficits because it can
borrow globally at very low prices.
Why is that?
(07:35):
Because people want to hold dollars.
That's what we mean when we say thatthe US has an exorbitant privilege.
The privilege of everybody in the worldwanting to hold the US currency, which
effectively allows the US to try to runtrade deficits for a long time without
necessarily that putting pressure on theeconomy and on the currency to devalue.
(07:58):
So if you think about that, theUS has had the ability to consume
as a result of the fact of havingthe currency that everybody wants
to buy, which is the dollar.
So the US welfare has been sustained atvery high levels as a result of that.
Steve Odland (08:18):
So let me see if I understood you correctly.
So the US is largely running tradedeficits with most of the other large
countries and trading blocs, whichmeans that the US imports more than
it exports in trade to those blocs.
As a result, that means thatas they import more, they're
(08:39):
paying for it with dollars.
There are more dollars going, in thiscase, to the EU or to China, than there
are currencies coming the other way.
And normally that would putpressure, downward pressure on the
US dollar, in this case, becausepeople want to hold, countries want
to hold that as a reserve currency.
That pressure hasn'thappened in the same way.
(09:02):
Conversely, the benefit of this has beenthe US consumer, who has benefited from
lower-cost goods and services cominginto the country than presumably they
would if they were all forced to beproduced and consumed domestically.
Is that roughly correct?
Maria Demertzis (09:22):
Exactly.
Or if the dollar was not as apopular currency as it is now.
So effectively, the US is a netborrower, whereas countries that
have surpluses, meaning the EUand China, they are net lenders.
They're the ones who lent money.
But the US has afforded to bea net borrower for a very long
time because of the dollar.
(09:42):
And indeed that has helped US consumption.
Steve Odland (09:46):
So this is off the subject to some extent, but then the question
is, why is the dollar valued so much?
Maria Demertzis (09:53):
Exactly.
Exactly.
This is not off-subject, actually, ifI may say, Steve, I think it's actually
essential to understand that privilege.
I will say in a minute thatactually, the privilege comes
also with responsibilities, butI will explain that in a minute.
It is actually the currency oflast resort, if I may call it this.
Two random countries in the world, let'ssay Chile and India, want to trade.
(10:15):
They can price in whichever currency theylike, but they typically trade, when they
exchange money, they trade in dollars.
That's what means that the dollaris the international currency.
And the US benefits from it becausethen it has more dollars that are
circulating in the world and thereforepays very little to borrow from the world.
That's the exorbitant privilege.
(10:36):
But why is the dollar so popular?
And in my view, it's two things.
The first one is thedollar is a good currency.
It's a stable currency, it's apredictable currency, and therefore
it's a unit of transaction, whichis what you need when you trade.
It is very reliable, meaning that Iknow when I say $1, I actually mean $1.
I know what it means in value.
That's the stability of the currency.
(10:57):
And it has to do with institutions.
It has to do with the Fed, ithas to do with the economy,
and it has to do with the law.
People trust that thedollar will be honored.
It's an economy and a societythat functions, and that's what
gives the dollar its demand.
The second one has to do withsettlements, and we must not
underestimate the value of settlement.
Meaning that, when these twocountries trade with each other for
(11:20):
this transaction to be, if you like,legitimate, it needs to be settled.
And if it's done in dollars, then itwill be settled by US authorities.
If it is done in Euros, it will settleby EU authorities, and it will be
sealed as a legitimate transaction.
There isn't an infrastructure acrossthe world between countries to
(11:41):
allow for this settlement to happen.
That's why many countries in theworld, in my example, Chile and
India, it's the second reason whythey like the dollar, because there
is a settlement infrastructure.
So two reasons (11:54):
good currency, and it provides the settlement infrastructure.
Steve Odland (11:59):
Yeah.
So that's supply and demand.
There's also, you have
to think about the supply aspects of it, too.
And part of the issue is the money supply,and the US Fed continuing to, to print
the currency and create more money.
Maria Demertzis (12:18):
That's right.
Steve Odland (12:18):
And jeopardizes potentially, depending on, there needs to be
expansion for the size of the economies,but it does jeopardize, potentially,
the value of the currency, as well.
Maria Demertzis (12:30):
So I think that comes now with, if I may call this sort of the
flip side of this exorbitant privilege.
As you say, typically if you printmoney that will be inflationary, right?
So the US prints money, but wedon't see the inflationary impact
coming from this plenty of money.
What the Fed does is it providesliquidity across the global
markets to sustain operations.
(12:52):
And in fact, typically, you seethis very much in during crisis.
We had this in the financial crisis,we had this in the pandemic crisis,
where the Fed extended what we callliquidity lines, effectively helping
banks across the world meeting theirobligations without that printing
of money affecting the US economy.
This is, if you like, the obligationthat comes with the exorbitant
privilege, if you are the currencyof last resort, to facilitate global
(13:17):
operations on the financial side.
Yeah, so that's really, if you like,the obligation that of course the US
does provide, almost as a public goodto the world, for the privilege that it
has of borrowing very cheaply globally.
But of course, the US can decide notto do this anymore, not to provide
(13:38):
this liquidity for whatever reason.
And that, of course, will damageinternational financial flows and, at
the end of the day, will also damagethe US because if the global market
doesn't work, nobody benefits from it.
But at the moment, it is thegoodwill of the US to provide that.
On the other hand, it does raisealso vulnerability for the US, and I
think that needs to be acknowledged.
And that is exactly the fact thatthis exorbitant privilege is because
(14:02):
countries really want the dollar.
If from one day to the other, the worldwakes up and says, "You know what?
I don't want the dollar, I don't want thesettlement infrastructure of the dollar.
I can do something else," that, ofcourse, will reduce the demand for
the dollar and it will also reducethe ability of the US to borrow so
cheaply and therefore also the abilityto sustain imports for so long.
(14:23):
So it will correct the current accountdeficit, but it will automatically also
reduce the welfare position of the US.
Steve Odland (14:30):
With privilege comes responsibility, essentially.
And that's the crux of therole of the independent US Fed.
We're talking about tradebalances, deficits, and surpluses.
We're going to take a shortbreak and be right back.
Welcome back to C-Suite Perspectives.
I'm your host, Steve Odland, fromThe Conference Board, and I'm joined
today by Maria Demertzis, the Economy,Strategy & Finance Center leader
(14:55):
of The Conference Board in Europe.
So Maria, before the break, wewere talking about trade balances,
the currency, and so forth.
Some of the politicians in the US andelsewhere have said that by running a
trade imbalance with another country,that some countries are simply
stealing the wealth of another country.
(15:19):
Why do they describe it that way?
And is that fair?
Maria Demertzis (15:24):
As we were saying earlier on, if you have a persistent
trade deficit without facing the riskof a currency devaluation, like the
US is, then the US benefits from it,provided it can sustain it, of course.
But I want to talk about that stealingof wealth the other way around.
Think of sustained surpluses.
(15:47):
And Europe is one of them.
Sustained surpluses means thatmoney from the EU leaves the
EU and gets spent elsewhere.
Typically, it is investors.
And if you have sustained surplusesand you have huge domestic investment
needs, then you have to ask thequestion, is this good for your bloc?
(16:09):
And I'm saying this becausethis is exactly the position
where the EU finds itself.
We have in the EU, on average peryear, about 400 billion euros that are
leaving the EU, and they're investedin other jurisdictions outside EU,
when at the same time we have abouta trillion of investment needs.
(16:30):
What does this mean?
It means that private money firms,European firms, do not think
that their investments will havea return that is worthwhile in
the EU, and they go elsewhere.
In fact, where do they go?
They go to the US, and they go to China.
So when you say stealing the wealthof nations, what do you actually mean?
Because the opportunity cost, seen froma surplus jurisdiction, the opportunity
(16:53):
cost of trade surpluses is enormous.
This is actually the soul-searchingthat is happening on right
now in the EU is about that.
How are we going to get European money,and indeed, anybody else's money if they
wanted, to come back to Europe and help uscover the investment needs that we have?
So I think this discussion onstealing wealth is misplaced.
(17:15):
If you are a country that runsdeficits which are sustained, there
will be market pressures to devalue.
If you have afforded to runtrade deficits without seeing the
pressures on the currency, it meansyou have an exorbitant privilege.
And I think this is where the US is.
Now that said, you have to alsoask the question, "But could it
be that trade deficit and tradeservices are manipulated?" I think
(17:37):
that's an important question to ask.
They could be manipulated, and Ithink we're going to get to that.
Steve Odland (17:42):
Yeah.
But I think your point is that you can'tjust say, it's stealing the wealth.
That's a political statement.
It's not an economic statement.
Maria Demertzis (17:52):
Exactly.
Steve Odland (17:53):
And it's not necessarily true if the currency is also being,
I don't want to say overvalued, buthighly valued beyond where it would be.
So there are benefits that come with it.
It shouldn't be thought ofas the wealth of a country.
And I think that's a really importantpoint because, and this is why we
(18:14):
went off and did our tangent on thecurrency, because you can't just think
of the trade balance in a vacuum.
You have to think about thecurrency impacts of that.
And so therefore, the wealthconcept is nullified by that.
But one thing that does happen incountries that run surpluses is that
(18:36):
it, particularly if it's goods, butalso a little less so with services,
is that you do provide jobs, domesticjobs in that country that are good.
And in a lot of cases, these aremanufacturing or mining jobs.
So talk about the characteristicsof countries that have trade
surpluses with other countries.
Maria Demertzis (18:59):
It's not predetermined, in the sense that, if you go around
and look at countries that have gotsurpluses, the first thing that one
can say is that, of course, if youhave natural resources, you're a
lot more likely to have surpluses.
Think about countries like Venezuela.
Yeah, think of countries likethe Arabian Peninsula, which have
become oil producers, effectively.
(19:20):
Think of countries like Norway.
It no longer has natural resources'cause they're exhausted, but it
has actually accumulated a sovereignfund that was built on the back
of the revenues coming from oil.
And, of course, it allows you toinvest it in a very responsible and
sustainable fashion, and thereforeit can afford to run trade surpluses.
So for a moment, there's nothingto do with the economic buildup,
(19:43):
of the fiber of the economy.
Then you have countries that are bigmanufacturers, like Germany, that
has a surplus, but then you have bigmanufacturers that do not have surpluses.
I'm thinking of Italy.
Italy is a big manufacturer.
We tend to forget that Italy isactually a big manufacturing country,
but it doesn't have a surplus.
And then you have countries thathave surpluses without being
(20:04):
manufacturing, and I'm thinkingof the Netherlands or Denmark.
Much smaller countries.
They have big services.
These are big service economies,both the Netherlands and Denmark
have got big surpluses and sustainedsurpluses, and they are all done
on the back of the service economy,not on the back of manufacturing.
So it's not predetermined thatif you are a big manufacturing
(20:25):
country, you will necessarily runsurpluses and the other way around.
I think you're right in sayingthat manufacturing created jobs,
but I think economic activityis not just about manufacturing.
And like I said, Denmark and Holland,the Netherlands, are two countries that
have got very low unemployment rates,very huge surpluses, and sustained over
time, and they're, for all intents andpurposes, service economies, primarily.
Steve Odland (20:49):
So in some cases, you're saying that yeah, there
is some accident to geography.
We think of the oil-producingcountries in the Middle East and
previously Norway, but not all.
And so therefore it comes down also toeconomic policy from those countries
or regions because you can createsurpluses, you can create value,
(21:10):
if you will, through other meansother than strict natural resources.
And services are an example of that.
Is that a fair summary?
Maria Demertzis (21:19):
Yeah, exactly.
But you can also have, andlet's talk about the elephant
in the room, which is China.
China does not have natural resources.
It has had a policy of huge manufacturing,"we wanted to become the manufacturing,
the factory of the world." And thepolicies to get there, and here,
I think you will agree with me.
Certainly you and the US agree on this.
(21:39):
There has been policies of actuallycontrolling prices in order to create
competitive products on the price side.
And in the early 2000s, when Chinajoined the international system, there
was for a very long time talk aboutprice manipulation, meaning you're
keeping the price of goods low, andyou can do it either by keeping prices
low or by keeping the currency low.
(22:01):
And you will remember the debatesback then of manipulation, if
you like, manipulation of yourcompetitive position, right?
If the value of your goods are, let'ssay a hundred, the fact that you're
keeping either prices or exchange verylow makes it much more competitive in
the global market, and therefore itallows China to capture market shares.
Yeah, this has always beenthe grievance that both the
(22:23):
EU and the US had with China.
But I think it's also fair to say thatChina has moved away from this for a
number of reasons, including becominga manufacturing jurisdiction in its own
right, given the research and developmentinvestments that they have made.
But at the beginning, meaning at theearly entry of China in the global
markets, it was very much a discussionabout manipulation of prices and
(22:46):
manipulation of exchange rates.
Steve Odland (22:48):
And this was the purpose of the WTO, the World Trade Organization, is
to create a level playing field with rulesby which all countries would operate.
And therefore you wouldn't have these sortof imbalances, if you will, dumping of
goods, that are in excess and so forth.
But it's not a perfect world,even if you're a WTO member, and
(23:11):
hence some of the grievances.
Maria Demertzis (23:14):
So if I may, thank you for bringing this up because I
think it's so crucial to talk about,effectively, the global rule book.
Because that's what the WTO is.
It is a global rule book.
When we talk about engaging intrade with each other or in these
investments, we need to have certaintypes of rules that we can follow
so that we can resolve disputes.
(23:35):
That's effectively whatmakes a system function.
A system can only be as strong as therule book in which it operates, and here
comes the problem with China, becauseit's interesting to see that the number
of disputes that have been brought againstChina in the WTO is not necessarily bigger
than the disputes against other countries.
(23:57):
Certainly per capita, if you like,or per trade, per unit of trade.
So that's interesting, which meansthat the China hasn't really violated
the rule book more than others have.
That is very interesting because that'snot how we tend to think about it.
But I think the issue, and thatis an important grievance.
Steve Odland (24:15):
But when you say that, you're saying in aggregate.
It may be that between one countryand China, it may be imbalanced,
but you're just saying in aggregate.
Maria Demertzis (24:24):
Yes, that's what I had in mind.
I haven't really checked the numberson bilateral disputes, but global
trade, China isn't necessarily a biggerviolator than other countries are.
But that's not necessarilythe whole story.
And here comes the "Who wrote the rulebook?" There is the law that we follow,
but there's also the spirit of the law.
(24:45):
And this is where disagreement happens.
I would say WTO is written by the USand Europe, effectively, and it is
under the understanding that we followcertain rules in the way that we allow
for our companies to be competitive.
So that we don't really sponsor ourcompanies to become competitive in
(25:06):
order to have a level playing field.
China has followed a completelydifferent business model, and
that is a business model where wefinance, we provide subsidies to our
companies in order to become big.
And certainly for particular sectors.
Think of manufacturing, think ofchips, think of electric batteries.
The dispute that we have is thatwhile China is following the rule
(25:31):
book of the WTO, it isn't necessarilyfollowing the spirit of the law.
And therefore, there's a clashof business models between, if I
may call it, the Western side andthe Chinese way of doing business.
This is the issue.
The WTO book is not writtenfor partners that do not
follow the same business model.
So the question is, we need a newbook, and who's going to write that
(25:54):
book, and who's going to hold the pen?
This is, of course, for the future.
I think that's really the problem.
Steve Odland (25:58):
And this is where all the WTO members need to get together
and come to some level of consensus.
You made the comment that China does nothave natural resources, but you could
think about it, they do have rare earthminerals, which is a natural resource,
but you could think about their naturalresources being their excess labor.
And therefore, their inexpensive labor,and hence their ability to become
the manufacturing center and thenship that stuff all over the world.
(26:21):
And then, so you are incurring massiveshipping costs, but it's still less
expensive than to produce in some ofthese more developed nations, where
the cost of labor is quite high.
So you could considerthat a natural resource.
Maria Demertzis (26:34):
Yeah, I put this under the business model, but effectively,
we are saying the same thing.
And remember there's the other big issuewith China is respect for human rights.
And that is, if you're not going torespect human rights and therefore
capitalize on that, keep costs low,as you say, then of course, you
can build up bigger manufacturing.
But if you were to follow equal ruleswhen it comes to human rights, then
(26:56):
of course, the cost will increase.
And that is part of the current grievancesthat we have with China, indeed.
Steve Odland (27:01):
Yeah.
So we tried to simplifyit to some extent.
These are complex things becausethere are so many variables between
countries, between trading blocs,and multiple ways to think about it.
Maria Demertzis, thanks for beingwith us today and helping us
understand trade surpluses, tradedeficits, and trade balances.
Maria Demertzis (27:20):
Thank you, Steve.
Thanks for having me.
Steve Odland (27:22):
And thanks to all of you for listening to C-Suite Perspectives.
I'm Steve Odland, and this series has beenbrought to you by The Conference Board.
Welcome to C-Suite Perspectives, a signature
series by The Conference Board.
I'm Steve Odland from The ConferenceBoard and the host of this podcast
series, and in today's discussion, we'regoing to talk about trade deficits.
What are they?
Why are we paying attentionto them all of a sudden?
And where are we going?
Joining me today is Maria Demertzis,the Economy, Strategy & Finance Center
(00:21):
leader in Europe at The Conference Board.
Maria, welcome.
Maria Demertzis (00:25):
Thank you, Steve.
Great to be here.
Steve Odland (00:28):
So Maria, I'm sure our listeners have heard trade deficits
in every media that they consume,but let's just start with the basics.
What is a trade deficit, andhow do they measure them?
Maria Demertzis (00:41):
A trade deficit is, I should say, maybe, a trade balance, it
is the difference between the amountof goods and services that the country
exports versus the amounts of goodsand services that the country imports.
That's the trade balance.
And if exports, the value of exports,is bigger than the value of inputs,
then the trade balance is in deficit.
(01:02):
And if the other way is true, if theexports are bigger than the imports, then
we have what we call a trade surplus.
Steve Odland (01:10):
And so how is this measured?
Is it measured, the governments measurethese things, is there somebody at
the border with an abacus doing this?
How do they literally do this?
Maria Demertzis (01:22):
The technological advancement of an abacus is probably
the right way of describing.
Yes, of course.
I think we mustn't underestimate thetechnology and the meticulousness
with which we measure these things.
National accounts, of which tradebalances are a part, are captured by
the data that comes into the ports.
These are the entry points and, ofcourse, the exit points for our exports,
(01:45):
and all of them are being collected.
Typically, and now I'm speaking forEurope, these are collected by the central
banks, or the balance of payments data.
They're the ones who are collectingthis, and there are very very tight rules
in ways that we are collecting this.
And effectively, what we are measuringin dollar terms or in Euro terms or
any other currency, depending on whichcountry you live, they measure the value
(02:06):
of the exports versus the value of theinputs, and there will be a corresponding
payment that needs to be made.
And that difference in the value will beeither a trade deficit or a trade surplus.
Steve Odland (02:18):
And is this done at the country level or the trading bloc level?
Maria Demertzis (02:23):
So I suppose for the US, it is at the country level, but
also for the EU, which is a tradingbloc, it is done at both levels.
So it is collected at the country level,and it is aggregated also at the EU
level, which is the trading bloc level.
Steve Odland (02:39):
So is the issue then country to country?
So in other words, if the US isrunning a trade deficit with Germany,
is that the issue, or an issue?
Or is the issue reallyversus the US versus the EU?
Just to use an example.
Maria Demertzis (02:56):
Things get a little bit more complicated here.
It really is both of what you described.
There will be a trade balanceposition of the US with Germany
and with France and with Italy.
But there will also be a trade balanceposition vis-a-vis the whole of the EU.
So we will have both numbers, andone is an aggregate of the other.
Steve Odland (03:17):
And which is relevant?
Are both relevant, both the countrylevel and the trading bloc level, or
is one more relevant than the other?
Maria Demertzis (03:26):
It depends what the underlying story is here.
It could very well be that theUS runs a trade deficit with one
country, let's call it Germany.
And that is true, there is atrade deficit, but it runs trade
surpluses with other countries.
Now, I don't actuallyhave the data in my head.
Collectively, the US hasa trade deficit with EU.
(03:50):
Collectively.
But that does not necessarilymean that it has a trade deficit
with every single country.
It's just that when youaggregate it up, it could be a
deficit, it could be a surplus.
Steve Odland (03:58):
And so it depends on, they're both relevant to some extent.
But because the EU negotiates tradeas a bloc, it really is the bloc
level that is the most relevant.
Maria Demertzis (04:13):
I think that's right.
It's a fair assessment.
The trade policy is unique in the EU,as you described, and therefore, to
the extent that you care about how thepolicies may be affecting or not affecting
trade balances, then of course, it willbe the bloc decision that matters, yes.
That's a fair description.
Steve Odland (04:28):
So why does the trade balance between nations or trading
partners, why does this matter?
Maria Demertzis (04:37):
OK.
That is actually a very good question.
And it is, and to an extent the answeris, and I think that's what you're driving
at, but please correct me if I'm wrong,I think you're driving as to whether
deficits are bad and services are good.
Is that necessarily the case?
And I think the answer to that isnot necessarily, it really depends.
So let's go back and lookat what is a trade deficit.
And when does a countryhave a trade deficit?
(04:59):
So if I may start fromthe very beginning.
There is an issueof trade specialization.
So think about German carsversus digital services.
There is an issue of specialization.
Germany tends to produce goodcars that the world wants to buy,
and then the US tends to producegood services or digital services.
(05:22):
You think of the big gaffers,you think of Netflix.
These are all US services, right?
And it is the case thatthere is a specialization.
One does services better, andthe other one does cars better.
So the fact that the two blocs trade, andagain, at this point I'm talking about
Germany versus the US, both benefit.
They benefit from the fact that they havebetter products because they happen to
(05:46):
have a specialization of one product.
So the bilateral tradeposition doesn't really matter.
But if you have one country that hasgot globally a trade deficit position,
then what this means is that this countryimports a lot more than it exports.
That's what a trade deficit means.
So the question that arisesafter that is, can this country
(06:08):
afford to pay for these imports.
And this is, I think, the interestingpart, at least in economic terms.
Can the country affordto buy so many imports and
therefore have a trade deficit?
And the answer to that questionvaries from country to country.
If you're a small country that aims tobuy goods from abroad, you are typically
(06:31):
going to have to pay in the currencyof the bloc from which you're buying.
If you don't have the means to dothat, you will not be able to buy that.
Or if you run a very largedeficit, there will be pressure
on your currency to depreciate.
So is that the story of the United States?
Because the United States havehad deficits for a very long time
(06:53):
and more or less globally, right?
Because the trade balance in theUS has been in a deficit position
globally, meaning with allcountries, for a very long time.
But have we seen pressures onthe dollar to depreciate as a
result of having a trade deficit?
And the answer is no, But why is that?
And here comes and this is an importantdifference, which makes I think the
(07:15):
US unique, and that is the dollar.
The countries that tradewith the US, and not just the
countries that trade, everybody'sinterested in having the dollar.
That means that the US can affordto run trade deficits because it can
borrow globally at very low prices.
Why is that?
(07:35):
Because people want to hold dollars.
That's what we mean when we say thatthe US has an exorbitant privilege.
The privilege of everybody in the worldwanting to hold the US currency, which
effectively allows the US to try to runtrade deficits for a long time without
necessarily that putting pressure on theeconomy and on the currency to devalue.
(07:58):
So if you think about that, theUS has had the ability to consume
as a result of the fact of havingthe currency that everybody wants
to buy, which is the dollar.
So the US welfare has been sustained atvery high levels as a result of that.
Steve Odland (08:18):
So let me see if I understood you correctly.
So the US is largely running tradedeficits with most of the other large
countries and trading blocs, whichmeans that the US imports more than
it exports in trade to those blocs.
As a result, that means thatas they import more, they're
(08:39):
paying for it with dollars.
There are more dollars going, in thiscase, to the EU or to China, than there
are currencies coming the other way.
And normally that would putpressure, downward pressure on the
US dollar, in this case, becausepeople want to hold, countries want
to hold that as a reserve currency.
That pressure hasn'thappened in the same way.
(09:02):
Conversely, the benefit of this has beenthe US consumer, who has benefited from
lower-cost goods and services cominginto the country than presumably they
would if they were all forced to beproduced and consumed domestically.
Is that roughly correct?
Maria Demertzis (09:22):
Exactly.
Or if the dollar was not as apopular currency as it is now.
So effectively, the US is a netborrower, whereas countries that
have surpluses, meaning the EUand China, they are net lenders.
They're the ones who lent money.
But the US has afforded to bea net borrower for a very long
time because of the dollar.
(09:42):
And indeed that has helped US consumption.
Steve Odland (09:46):
So this is off the subject to some extent, but then the question
is, why is the dollar valued so much?
Maria Demertzis (09:53):
Exactly.
Exactly.
This is not off-subject, actually, ifI may say, Steve, I think it's actually
essential to understand that privilege.
I will say in a minute thatactually, the privilege comes
also with responsibilities, butI will explain that in a minute.
It is actually the currency oflast resort, if I may call it this.
Two random countries in the world, let'ssay Chile and India, want to trade.
(10:15):
They can price in whichever currency theylike, but they typically trade, when they
exchange money, they trade in dollars.
That's what means that the dollaris the international currency.
And the US benefits from it becausethen it has more dollars that are
circulating in the world and thereforepays very little to borrow from the world.
That's the exorbitant privilege.
(10:36):
But why is the dollar so popular?
And in my view, it's two things.
The first one is thedollar is a good currency.
It's a stable currency, it's apredictable currency, and therefore
it's a unit of transaction, whichis what you need when you trade.
It is very reliable, meaning that Iknow when I say $1, I actually mean $1.
I know what it means in value.
That's the stability of the currency.
(10:57):
And it has to do with institutions.
It has to do with the Fed, ithas to do with the economy,
and it has to do with the law.
People trust that thedollar will be honored.
It's an economy and a societythat functions, and that's what
gives the dollar its demand.
The second one has to do withsettlements, and we must not
underestimate the value of settlement.
Meaning that, when these twocountries trade with each other for
(11:20):
this transaction to be, if you like,legitimate, it needs to be settled.
And if it's done in dollars, then itwill be settled by US authorities.
If it is done in Euros, it will settleby EU authorities, and it will be
sealed as a legitimate transaction.
There isn't an infrastructure acrossthe world between countries to
(11:41):
allow for this settlement to happen.
That's why many countries in theworld, in my example, Chile and
India, it's the second reason whythey like the dollar, because there
is a settlement infrastructure.
So two reasons (11:54):
good currency, and it provides the settlement infrastructure.
Steve Odland (11:59):
Yeah.
So that's supply and demand.
There's also, you have
to think about the supply aspects of it, too.
And part of the issue is the money supply,and the US Fed continuing to, to print
the currency and create more money.
Maria Demertzis (12:18):
That's right.
Steve Odland (12:18):
And jeopardizes potentially, depending on, there needs to be
expansion for the size of the economies,but it does jeopardize, potentially,
the value of the currency, as well.
Maria Demertzis (12:30):
So I think that comes now with, if I may call this sort of the
flip side of this exorbitant privilege.
As you say, typically if you printmoney that will be inflationary, right?
So the US prints money, but wedon't see the inflationary impact
coming from this plenty of money.
What the Fed does is it providesliquidity across the global
markets to sustain operations.
(12:52):
And in fact, typically, you seethis very much in during crisis.
We had this in the financial crisis,we had this in the pandemic crisis,
where the Fed extended what we callliquidity lines, effectively helping
banks across the world meeting theirobligations without that printing
of money affecting the US economy.
This is, if you like, the obligationthat comes with the exorbitant
privilege, if you are the currencyof last resort, to facilitate global
(13:17):
operations on the financial side.
Yeah, so that's really, if you like,the obligation that of course the US
does provide, almost as a public goodto the world, for the privilege that it
has of borrowing very cheaply globally.
But of course, the US can decide notto do this anymore, not to provide
(13:38):
this liquidity for whatever reason.
And that, of course, will damageinternational financial flows and, at
the end of the day, will also damagethe US because if the global market
doesn't work, nobody benefits from it.
But at the moment, it is thegoodwill of the US to provide that.
On the other hand, it does raisealso vulnerability for the US, and I
think that needs to be acknowledged.
And that is exactly the fact thatthis exorbitant privilege is because
(14:02):
countries really want the dollar.
If from one day to the other, the worldwakes up and says, "You know what?
I don't want the dollar, I don't want thesettlement infrastructure of the dollar.
I can do something else," that, ofcourse, will reduce the demand for
the dollar and it will also reducethe ability of the US to borrow so
cheaply and therefore also the abilityto sustain imports for so long.
(14:23):
So it will correct the current accountdeficit, but it will automatically also
reduce the welfare position of the US.
Steve Odland (14:30):
With privilege comes responsibility, essentially.
And that's the crux of therole of the independent US Fed.
We're talking about tradebalances, deficits, and surpluses.
We're going to take a shortbreak and be right back.
Welcome back to C-Suite Perspectives.
I'm your host, Steve Odland, fromThe Conference Board, and I'm joined
today by Maria Demertzis, the Economy,Strategy & Finance Center leader
(14:55):
of The Conference Board in Europe.
So Maria, before the break, wewere talking about trade balances,
the currency, and so forth.
Some of the politicians in the US andelsewhere have said that by running a
trade imbalance with another country,that some countries are simply
stealing the wealth of another country.
(15:19):
Why do they describe it that way?
And is that fair?
Maria Demertzis (15:24):
As we were saying earlier on, if you have a persistent
trade deficit without facing the riskof a currency devaluation, like the
US is, then the US benefits from it,provided it can sustain it, of course.
But I want to talk about that stealingof wealth the other way around.
Think of sustained surpluses.
(15:47):
And Europe is one of them.
Sustained surpluses means thatmoney from the EU leaves the
EU and gets spent elsewhere.
Typically, it is investors.
And if you have sustained surplusesand you have huge domestic investment
needs, then you have to ask thequestion, is this good for your bloc?
(16:09):
And I'm saying this becausethis is exactly the position
where the EU finds itself.
We have in the EU, on average peryear, about 400 billion euros that are
leaving the EU, and they're investedin other jurisdictions outside EU,
when at the same time we have abouta trillion of investment needs.
(16:30):
What does this mean?
It means that private money firms,European firms, do not think
that their investments will havea return that is worthwhile in
the EU, and they go elsewhere.
In fact, where do they go?
They go to the US, and they go to China.
So when you say stealing the wealthof nations, what do you actually mean?
Because the opportunity cost, seen froma surplus jurisdiction, the opportunity
(16:53):
cost of trade surpluses is enormous.
This is actually the soul-searchingthat is happening on right
now in the EU is about that.
How are we going to get European money,and indeed, anybody else's money if they
wanted, to come back to Europe and help uscover the investment needs that we have?
So I think this discussion onstealing wealth is misplaced.
(17:15):
If you are a country that runsdeficits which are sustained, there
will be market pressures to devalue.
If you have afforded to runtrade deficits without seeing the
pressures on the currency, it meansyou have an exorbitant privilege.
And I think this is where the US is.
Now that said, you have to alsoask the question, "But could it
be that trade deficit and tradeservices are manipulated?" I think
(17:37):
that's an important question to ask.
They could be manipulated, and Ithink we're going to get to that.
Steve Odland (17:42):
Yeah.
But I think your point is that you can'tjust say, it's stealing the wealth.
That's a political statement.
It's not an economic statement.
Maria Demertzis (17:52):
Exactly.
Steve Odland (17:53):
And it's not necessarily true if the currency is also being,
I don't want to say overvalued, buthighly valued beyond where it would be.
So there are benefits that come with it.
It shouldn't be thought ofas the wealth of a country.
And I think that's a really importantpoint because, and this is why we
(18:14):
went off and did our tangent on thecurrency, because you can't just think
of the trade balance in a vacuum.
You have to think about thecurrency impacts of that.
And so therefore, the wealthconcept is nullified by that.
But one thing that does happen incountries that run surpluses is that
(18:36):
it, particularly if it's goods, butalso a little less so with services,
is that you do provide jobs, domesticjobs in that country that are good.
And in a lot of cases, these aremanufacturing or mining jobs.
So talk about the characteristicsof countries that have trade
surpluses with other countries.
Maria Demertzis (18:59):
It's not predetermined, in the sense that, if you go around
and look at countries that have gotsurpluses, the first thing that one
can say is that, of course, if youhave natural resources, you're a
lot more likely to have surpluses.
Think about countries like Venezuela.
Yeah, think of countries likethe Arabian Peninsula, which have
become oil producers, effectively.
(19:20):
Think of countries like Norway.
It no longer has natural resources'cause they're exhausted, but it
has actually accumulated a sovereignfund that was built on the back
of the revenues coming from oil.
And, of course, it allows you toinvest it in a very responsible and
sustainable fashion, and thereforeit can afford to run trade surpluses.
So for a moment, there's nothingto do with the economic buildup,
(19:43):
of the fiber of the economy.
Then you have countries that are bigmanufacturers, like Germany, that
has a surplus, but then you have bigmanufacturers that do not have surpluses.
I'm thinking of Italy.
Italy is a big manufacturer.
We tend to forget that Italy isactually a big manufacturing country,
but it doesn't have a surplus.
And then you have countries thathave surpluses without being
(20:04):
manufacturing, and I'm thinkingof the Netherlands or Denmark.
Much smaller countries.
They have big services.
These are big service economies,both the Netherlands and Denmark
have got big surpluses and sustainedsurpluses, and they are all done
on the back of the service economy,not on the back of manufacturing.
So it's not predetermined thatif you are a big manufacturing
(20:25):
country, you will necessarily runsurpluses and the other way around.
I think you're right in sayingthat manufacturing created jobs,
but I think economic activityis not just about manufacturing.
And like I said, Denmark and Holland,the Netherlands, are two countries that
have got very low unemployment rates,very huge surpluses, and sustained over
time, and they're, for all intents andpurposes, service economies, primarily.
Steve Odland (20:49):
So in some cases, you're saying that yeah, there
is some accident to geography.
We think of the oil-producingcountries in the Middle East and
previously Norway, but not all.
And so therefore it comes down also toeconomic policy from those countries
or regions because you can createsurpluses, you can create value,
(21:10):
if you will, through other meansother than strict natural resources.
And services are an example of that.
Is that a fair summary?
Maria Demertzis (21:19):
Yeah, exactly.
But you can also have, andlet's talk about the elephant
in the room, which is China.
China does not have natural resources.
It has had a policy of huge manufacturing,"we wanted to become the manufacturing,
the factory of the world." And thepolicies to get there, and here,
I think you will agree with me.
Certainly you and the US agree on this.
(21:39):
There has been policies of actuallycontrolling prices in order to create
competitive products on the price side.
And in the early 2000s, when Chinajoined the international system, there
was for a very long time talk aboutprice manipulation, meaning you're
keeping the price of goods low, andyou can do it either by keeping prices
low or by keeping the currency low.
(22:01):
And you will remember the debatesback then of manipulation, if
you like, manipulation of yourcompetitive position, right?
If the value of your goods are, let'ssay a hundred, the fact that you're
keeping either prices or exchange verylow makes it much more competitive in
the global market, and therefore itallows China to capture market shares.
Yeah, this has always beenthe grievance that both the
(22:23):
EU and the US had with China.
But I think it's also fair to say thatChina has moved away from this for a
number of reasons, including becominga manufacturing jurisdiction in its own
right, given the research and developmentinvestments that they have made.
But at the beginning, meaning at theearly entry of China in the global
markets, it was very much a discussionabout manipulation of prices and
(22:46):
manipulation of exchange rates.
Steve Odland (22:48):
And this was the purpose of the WTO, the World Trade Organization, is
to create a level playing field with rulesby which all countries would operate.
And therefore you wouldn't have these sortof imbalances, if you will, dumping of
goods, that are in excess and so forth.
But it's not a perfect world,even if you're a WTO member, and
(23:11):
hence some of the grievances.
Maria Demertzis (23:14):
So if I may, thank you for bringing this up because I
think it's so crucial to talk about,effectively, the global rule book.
Because that's what the WTO is.
It is a global rule book.
When we talk about engaging intrade with each other or in these
investments, we need to have certaintypes of rules that we can follow
so that we can resolve disputes.
(23:35):
That's effectively whatmakes a system function.
A system can only be as strong as therule book in which it operates, and here
comes the problem with China, becauseit's interesting to see that the number
of disputes that have been brought againstChina in the WTO is not necessarily bigger
than the disputes against other countries.
(23:57):
Certainly per capita, if you like,or per trade, per unit of trade.
So that's interesting, which meansthat the China hasn't really violated
the rule book more than others have.
That is very interesting because that'snot how we tend to think about it.
But I think the issue, and thatis an important grievance.
Steve Odland (24:15):
But when you say that, you're saying in aggregate.
It may be that between one countryand China, it may be imbalanced,
but you're just saying in aggregate.
Maria Demertzis (24:24):
Yes, that's what I had in mind.
I haven't really checked the numberson bilateral disputes, but global
trade, China isn't necessarily a biggerviolator than other countries are.
But that's not necessarilythe whole story.
And here comes the "Who wrote the rulebook?" There is the law that we follow,
but there's also the spirit of the law.
(24:45):
And this is where disagreement happens.
I would say WTO is written by the USand Europe, effectively, and it is
under the understanding that we followcertain rules in the way that we allow
for our companies to be competitive.
So that we don't really sponsor ourcompanies to become competitive in
(25:06):
order to have a level playing field.
China has followed a completelydifferent business model, and
that is a business model where wefinance, we provide subsidies to our
companies in order to become big.
And certainly for particular sectors.
Think of manufacturing, think ofchips, think of electric batteries.
The dispute that we have is thatwhile China is following the rule
(25:31):
book of the WTO, it isn't necessarilyfollowing the spirit of the law.
And therefore, there's a clashof business models between, if I
may call it, the Western side andthe Chinese way of doing business.
This is the issue.
The WTO book is not writtenfor partners that do not
follow the same business model.
So the question is, we need a newbook, and who's going to write that
(25:54):
book, and who's going to hold the pen?
This is, of course, for the future.
I think that's really the problem.
Steve Odland (25:58):
And this is where all the WTO members need to get together
and come to some level of consensus.
You made the comment that China does nothave natural resources, but you could
think about it, they do have rare earthminerals, which is a natural resource,
but you could think about their naturalresources being their excess labor.
And therefore, their inexpensive labor,and hence their ability to become
the manufacturing center and thenship that stuff all over the world.
(26:21):
And then, so you are incurring massiveshipping costs, but it's still less
expensive than to produce in some ofthese more developed nations, where
the cost of labor is quite high.
So you could considerthat a natural resource.
Maria Demertzis (26:34):
Yeah, I put this under the business model, but effectively,
we are saying the same thing.
And remember there's the other big issuewith China is respect for human rights.
And that is, if you're not going torespect human rights and therefore
capitalize on that, keep costs low,as you say, then of course, you
can build up bigger manufacturing.
But if you were to follow equal ruleswhen it comes to human rights, then
(26:56):
of course, the cost will increase.
And that is part of the current grievancesthat we have with China, indeed.
Steve Odland (27:01):
Yeah.
So we tried to simplifyit to some extent.
These are complex things becausethere are so many variables between
countries, between trading blocs,and multiple ways to think about it.
Maria Demertzis, thanks for beingwith us today and helping us
understand trade surpluses, tradedeficits, and trade balances.
Maria Demertzis (27:20):
Thank you, Steve.
Thanks for having me.
Steve Odland (27:22):
And thanks to all of you for listening to C-Suite Perspectives.
I'm Steve Odland, and this series has beenbrought to you by The Conference Board.
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