Those stunning trade figures!

Yesterday’s trade figures show that the trade deficit for goods and services hit £4.8 bn in December and the deficit for goods alone was £9.2 bn; both were the worst figures ever. The annual trade deficit for 2010 was £46.2 bn, up from
£29.7 bn in 2009. In fairness, it should be noted that there was a £51 bn annual surplus on trade in services but that this was down £1.7 bn from 2009.

Isn\’t it wonderful!


That means that foreigners have invested £ 46 billion in the UK this year just gone. How excellent, that means that there must be more investment, more jobs, more productive capacity, in the pipeline, for we\’ve more capital to play with.

Hmm, what\’s that? You\’ve forgotten that the balance of payments must balance, have you?

9 thoughts on “Those stunning trade figures!”

  1. I’ve never really got my head around these balance of payments – is it possible that all that went on government borrowing?

  2. This is silly Tim. Some of the £46 billion might represent FDI, and be improving the productive side of the economy (although they’re still foreign owned, by definition), but it could also be going into govt bonds, cash, purchase of property and so on. At the end of the day it’s a debt, and while rising debt can be a good thing, it isn’t automatically so.

  3. Forgive me, but isn’t the trade account roughly the difference between total imports and total exports?

    Aren’t we permanently buying more from the RoW than they buy from us, and thus living beyond our means in debt?

    “Annual income twenty pounds; annual expenditure twenty pounds, aught and six – result misery.”

    Tim adds: No, because the balance of payments must balance. We might be buying more goods than we sell, but that must and is balanced by their buying more capital items (land, companies etc) from us than we sell to them. By definition this must be true.

  4. Matthew Illsley – you’re kind of right. “Buying more capital items” is a fancy way of saying ‘accepting payment’.

    Think of your relationship with the supermarket. They have a current acocunt surplus with you, and you have a capital account surplus with them.

  5. Tim I think you really need to re-think how you interpret trade.

    Here’s what could be happening: we borrow money from foreigners to buy cheap foreign consumption goods, the foreigners use all the money we owe them to purchase our entire domestic productive capital stock.

    That is to say, we could be using trade to swap our productive assets for consumption goods.

    Just because people are doing this voluntarily in a market system does not mean it’s optimal.

    Of course, this isn’t necessarily what’s going on. But it’s just silly to take an attitude that says no matter how much we borrow from abroad, flog off our assets, can cheap stuff we import, it can only be a good thing.

    Think of something simple like model in which an economy produces output that it can either consume or invest. Investment produces future output. Optimality involves finding a trade off between the cost of sacrificing consumption today and getting future consumption from investment.

    Now in such a model, you can consume your capital stock, have a consumption binge and then you’re fucked because you have no capital stock to produce output. No model of optimizing behavior predicts anything like that.

    You could also swap your capital stock for consumption goods, with foreigners, via borrowing cash from them.

    You can argue that if the deal is good enough, it’s rational to some extent, you can argue that we might be able to pay them back by selling them our output rather than our capital stock, but you have to recognize that is possible to make bad intertemporal deals

    or we could just inflate the hell out of our currency and leave them holding bugger all in real terms, who knows.

  6. I think I’ve worked it out – Tim is double counting. He thinks we get the goods, AND we get money, and they get assets/bonds/shares/etc.

  7. It kinda depends on what we think the value of the assets that we’re flogging to the foreigners is, doesn’t it?

    For example, if we’re funding our trade deficit by selling British companies to foreign companies for twice what they’re rationally worth, then that’s not a bad deal on our part (and, to some extent, this is what was happening in the late 2000s – British retailers who weren’t any good and who’ve now gone bust were being sold to Icelandic and Irish businessmen; British shipping companies were being sold at twice their stock market value to Arab sovereign wealth funds, etc…)

  8. This is of course partly how the US gets away with it. Classic example the dotcom boom, where you announce, watch its stockmarket value soar to $20 billion, flog it to investors in another country in return (indirectly) for 1 million cars.

    It’s not a particularly sustainable long-term strategy (although investment flows suggest it can be done for longer than you think).

    And it doesn’t apply to a lot of assets as much, although I imagine some of the London property might not look so clever in 10 years time.

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