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Jakob Wilhelmus
Senior Research Analyst, International Finance and Macroeconomics Research
Capital Flows and Finance and Regulation and Systemic Risk
Jakob Wilhelmus is a senior research analyst in international finance and macroeconomics at the Milken Institute. He studies topics relating to systemic risk, capital flows, and investment. Concentrating on market-level information, his work focuses on identifying and analyzing financial data to produce a better understanding of the behavior and underlying...
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Critical to Keep Benefits of Trade Deficit in Mind Ahead of Merkel Visit

By: Jakob Wilhelmus
March 28, 2017
   
   

German Chancellor Angela Merkel’s Friday visit to Washington has refocused attention on the U.S. trade deficit, bilateral trade and the demise of American manufacturing employment. 

More specifically, it has put a spotlight on the $65 billion U.S. trade deficit with Germany. Merkel’s Germany has maintained a trade surplus led in large measure by manufacturing, the very arena where American workers have lost so much ground. There have been calls for bilateral discussions on how to reduce the imbalance.

The narrow focus on trade in goods, the most-quoted measure of U.S. deficits with Germany and the rest of the world, ignores the other side of the exchange — the trillions of dollars the U.S. receives in foreign investment, which includes factories built here by foreign companies and the purchase of stock, corporate debt and government bonds by overseas investors.

Germany is a prime example of this foreign investment — while the U.S. has a $65 billion deficit in trade of goods, Germany’s investment position in U.S. securities stood at $350 billion at the beginning of 2016. Those investments provided capital to businesses and helped finance essential services. 

International investors don’t make these investments to finance the U.S. current account deficit. They consider it a sound use of capital that offers efficiency, transparency and liquidity. This influx of foreign money allows the U.S. to operate much like a business that gets funding at low rates and earns higher returns on its investments.

In fact, the U.S. was one of a few countries in 2015 that received more income on investments abroad than it had to pay out to its creditors — a 0.5 percent spread. America has been doing this successfully for decades, consistently pushing globalization that has sustained an inflow of capital which, in turn, has driven unemployment to historic lows.

The downside is that a booming trade in financial assets doesn’t necessarily translate into broad-based prosperity. The globalization trends that have driven markets up have also meant the loss of millions of jobs in some sectors — five million in manufacturing since 2000 — as entire domestic supply chains have moved overseas.

That’s the rub that has left millions of Americans feeling like they’ve gotten a raw deal. It also explains the longing to, in effect, turn back the clock to a time when American manufacturers dominated international trade.

There are no simple answers to the problems that confront families and communities harmed by globalization, and it does little good to shrug off their plight as the inevitable consequence of a new industrial revolution.

What we really need to think about is not how to reverse globalization, but how to extend the benefits of one of America’s greatest strength — its competitive advantage in capital markets. The inflow of capital from abroad has allowed the U.S. to become the world’s innovation capital in technology, healthcare and finance.

The problem is that the gains have been concentrated, for the most part, in a few metropolitan centers. Perhaps one answer is to encourage the geographic redistribution of jobs. In many industries, technology has eliminated the need for employees to be in the same building — or the same state — as their bosses and colleagues.

Some Wall Street companies have begun to embrace this concept. Over the past few years, Goldman Sachs has moved about 1,800 employees to Salt Lake City. Jacksonville, Fla., is home to about 19,000 employees from JPMorgan Chase, Wells Fargo and Bank of America.

In the big picture, these may be small steps, but they suggest that there are ways to share the upside of Wall Street’s prosperity across a wider swath of America.

Any argument about the balance of trade must recognize the value of capital markets and their indispensable role in financing innovation. The solution won’t be found in the past. We will find it by moving forward to ensure that markets continue to do what they do best: drive innovation.


This article first appeared in The Hill on March 14, 2017.


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