The Best Trade Deal
Keep Trade Great, Again
In honor of DJT and his desire for us to get the best deals, here is a succinct breakdown of how we should hope foreigners exchange with us.
Consider three identities:
Having goods and services >>> not having goods and services
Goods and services > capital (which is just potential goods and services)
Capital > raw currency
When we buy imports, foreigners get our money. At which point they could do any of the following (this is an exhaustive list; i.e., there are no other options)1:
Directly buy goods and services from us (U.S. exports)
Indirectly buy goods and services from us through trade with a third country (not materially different than item #1)
Invest in our economy buy buying stocks or bonds or land or some other form of capital
Hold the money we give them indefinitely
These are listed from most bad to least bad where the last item is virtually a pure benefit. It would be very close to theft where we are getting away like a successful thief with the goods.
If foreigners chose to invest in our capital stock, U.S. investors gain as the value of their holdings increase. The foreign holders of these assets can only benefit if the assets generate higher value—some combination of generating positive cash flows and increasing in price.
Sadly, if foreigners chose to buy goods and services from us (directly or through an intermediary country), our bluff is called. We then have to give something of near equal value for what we initially gained. This isn't so bad since we are presumably willing to do this; hence, the mutually agreed-upon trade happens. So there are gains to both sides in both transactions:
An American at first got the imported good or service. A foreign entity got money they presumably wanted more than the good or service they surrendered.
An American then got the money from the exported good or service. They then can do any of the items 1-4 as listed above with them playing the role of “foreigner”. The foreign entity got the good or service.
If we could only convince foreigners to hold all that U.S. money we give them instead of using it in any of the other ways, we could live like kings forever! And the government could get rich too from the seigniorage in printing the internally-needed replacement currency.
Alas, foreigners are too smart. They will end up making us work to produce goods and services for them (i.e., exports).
Exchanging the U.S. currency for their own in FX markets is not actually doing something with the money. That is just a transformation of one kind of money for another. It is not precisely the same as simply changing denomination within the same currency, but it is relatively close for purposes of this simplified post.