US deficit with Asia masks flight of capital
Alan Greenspan, chairman of the US Federal Reserve Board, has said he takes Asia's financial troubles into account when considering interest-rate policies, and he has also referred to the growing trade deficit the US has with Asia.
We in Asia can all thank Mr Greenspan for keeping US interest rates low, but thinking on the US trade deficit needs a closer focus.
The deficit has clearly widened. US exports to Asia excluding Japan are declining rapidly. The latest figures show them dropping by 15 per cent on a six-month average basis, while imports from the same countries are still rising by more than 10 per cent, as the first chart shows.
This is only to be expected in a time of financial crisis. The money is simply no longer available in Asia to buy American goods in the amounts they were bought before, and the most obvious way for Asia to get the money back is to sell more than it buys.
But the real culprits in Asia for the US trade deficit are Japan, the mainland and Taiwan. The latest figures show that, of the overall US trade deficit of US$198 billion in the 12 months to May this year, these three countries accounted for $126 billion. The figure for the rest of Asia was only $28 billion.
The point about this is that US has always had trade troubles with Japan, and the deficit with Japan has been greater in the past than it is now. It won't do to attribute the deficit now to Japan's financial problems. There has to be more in this equation.
It also won't do to attribute the deficits with Taiwan and China to their financial troubles. These two are the least troubled of all Asian countries. Their trade surpluses with the US stem from the fact that they are efficient producers of light consumer goods, more efficient than their domestic US competitors.
But there is another way of looking at all of this. The balance of payments is called a balance because its two sides, the current account and the capital account (including reserve movements), must balance. It is, like the laws of the Medes and the Persians, an immutable rule.
In other words, if Country X buys from the rest of the world more than it sells then the rest of the world will find itself investing exactly that same amount of money in Country X.
So what we have here at the moment is Asian capital flight into the US because the US happens to be the most secure investment haven at the moment. It means that Asia has to run a trade surplus in order to generate the money for the capital outflow, or the balance of payments won't balance (and it has to).
If ever the US runs into trouble because of its trade deficit and that deficit is reduced, it will mean that the capital flow into the US is also reduced (that immutable rule again). This would imply less capital outflow from Asia and a return of confidence in the region.
Bad investment news in Asia implies good investment news in the US and the reverse can also be true. It's the way the balance of payments works.