Westpac produce a very detailed chart pack on the US economy called Northern Exposure. One item that stands out like a sore thumb is the trade imbalance between the US and Asia:
The trade balance between most countries and the US is close to equilibrium, where imports match exports:
- Mexico: 2% surplus
- UK: 1% surplus
- Eurozone: 1% deficit
- Other: 2% surplus
But there are three notable exceptions:
- China: 15% deficit
- Japan: 3% deficit
- Canada: 9% surplus
Any large trade imbalance should cause the exchange rate between the two countries to rise or fall, making the exports of the net exporter more expensive and imports from the net importer cheaper, until balance is restored. But this has not happened with China and Japan. They are manipulating the system: investing a large portion of their trade surplus back in the US through the financial account, so that trade flows in one direction are offset by capital flows in the other. Their actions are clearly visible in the growth of Rest of World investment in US Treasury securities.
That is the reason why the US consistently runs massive trade deficits and why the manufacturing sector has been shedding jobs for the last two decades. This could be prevented if the US was willing to regulate capital flows on the financial account: “we will open our capital markets to you if you open yours to US investors”.