Why are major European economies not on the same level of trade deficit with Japan like the US is?

http://www.worldstopexports.com/japans-top-import-partners/

Trade deficits can be a good or bad for an economy, but trade surpluses can also be a good or a bad sign. Even a trade balance of zero meaning that a nation is neither a net borrower nor lender in the international economy can be either positive or negative.

Components of a National Account Balance

· Goods

· Services

· Income receipts and payments

· Unilateral transfers

In the past it was common to track the physical items that were transported by air, ocean or ground between countries as a way of measuring the balance of trade. This measurement is called the merchandise trade balance. In most high-developed economies, goods make up less than half of a country’s total production, while services compose more than half. The last two decades have seen a surge in international trade in services, fueled by technological innovation in telecommunications and computers that made it possible to export or import services like telephone answering service, financial, law, advertising, management consulting, software, construction engineering, and product design among others. Most world trade still is in the form of goods rather than services, and the merchandise trade balance is still posted by governments and reported by newspapers. In economic analysis, however, one must rely on broader measures such as the balance of trade or the current account balance which includes other international flows of capital and foreign aid.

Overall trade in services is still relatively small compared to trade in goods, the importance of services has expanded substantially over the last few decades.

In reference to the third component of the current account balance, labeled “income payments,” it accounts for the money received by U.S. financial investors on their foreign investments and payments to foreign investors who had invested their funds in the U.S. The reason for including this money on foreign investment in the total measure of trade, along with goods and services, is that, from an economic perspective, income is just another economic transaction as equivalent to the shipments of cars or wheat or any other commodity.

The last item of the current account balance is the unilateral transfers of funds, which are payments made by government, private charities, or individuals where money is sent abroad without any link to merchandise or service. Foreign aid or military assistance to other countries qualifies in this category, as does it spending for charities of poverty or social programs.

When a person from the United States spends money overseas, it is also counted in this category. The current account balance considers these unilateral payments as imports, because they involved a stream of payments leaving the country.

Public opinion regarding trade deficits and surpluses might change if we the review the labels if for instance a trade deficit is called obtaining foreign direct investment and trade surplus renamed investing abroad the negative connotations of labels can be dispensed with. The relationships between trade flows of merchandise, services and flows of international payments must be clearly understood because these relationships are about the causes, benefits, and risks of different kinds of trade balances.

For example the United States exports 14% of GDP while Germany exports about 50% of its GDP.

What are the consequences?

It indicates that Germany has a higher level of trade than the United States whilst the United States has a large domestic economy so its internal trade is voluminous. As a result a large economy tends to have lower levels of international trade and it has little impact on its trade imbalance. Moreover, an imbalance between domestic investment by government and private sector contrasted with national saving will always lead to a trade imbalance, but has little to do with the level of trade.

How does our national savings rate impact our trade deficit?

Some economists claim U.S. trade deficits are caused by the low savings rate of Americans. But mainstream trade journals continue to assert that trade deficits don’t really matter.

On June 20, 2017, the Coalition for a Prosperous America released a research paper, “Do Savings Rates Cause Trade Deficits?” by CEO Michael Stumo and Research Director Jeff Ferry that shows why globalist economists are wrong about what causes trade deficits, offshoring and job losses.

They write, “A popular, but misleading, claim is that low U.S. savings, relative to investment, causes our trade deficit. For example, Harvard professor and former Reagan administration advisor Martin Feldstein has said that the U.S. fiscal deficit, which indeed reduces national savings, is the cause of the trade deficit. ‘If a country consumes more than it produces, it must import more than it exports.’”

Other economists view the issue of trade deficits with a different lens. They say that America is exporting its paper money for goods made in China and other countries that need reserve currencies such as dollars, to purchase raw materials from other countries.

The traditional macroeconomics equation of basic Gross Domestic Product does not reflect the issue of currency markets or exchange rates. For instance the recent tax cut Trump instituted in the American economy places the GDP to debt ratio at 106% which inflates the value of the dollar or undervalues the dollar reserves many countries are already holding. In contrast the EU has a GDP to debt ratio of 81% making it a more desirable reserve currency.

Everybody agrees that reform is needed in currency exchange markets and not only in merchandise trade markets for as long as budget deficits and national debt continue to rise, specially, in the USA for its dollar preferred place in the world as a reserve currency retracts while other currencies begin to displace it.

These real-world changes directly impact one or more variables within the identity GDP equation, transmitted through by mathematical necessity. In short, national savings is related to the trade deficit in an accounting sense but it is not its causation.

The relationship between savings and trade deficits can be best explained in a mathematical accounting identity but this do not reflect the causal relationships between savings, investment, and trade flows. A merchandise trade deficit reduces the incomes of domestic workers however; exporting paper money reduces the cost of imports which benefits the lower income brackets.

In 2005, the Federal Reserve Board chairman Ben Bernanke argued that “the large and growing U.S. current account deficit is caused not by anything happening in the U.S., but by decisions taken by emerging economy nations to run very high savings rates, pursue export-led growth, and lend money to other countries, especially the U.S. He called the situation a global savings glut. These excessive inflows of foreign savings raise the U.S. dollar exchange rate, drive down our interest rates, and force our economy into a trade deficit.”

Tactics of Surplus Producing Countries Use

Many authors agree that “Export-oriented or investment-oriented countries can utilize domestic and foreign policies to reduce consumption, increase production and export at very competitive prices.”

In the case of China:

Wage growth is constrained to below the growth of worker productivity

Undervalued exchange rate

Government subsidizes to Chinese manufacturers

Vast amounts of surplus labor that produces more than it consumes

Unethical accounting practices for valuation and investment