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 Richmans' Trade and Taxes Blog

The Egyptian Trade Deficits
Howard Richman, 7/15/2013

On July 4, writing on  his blog, the modern day Spengler (David P. Goldman) had an excellent posting (Dismiss the Egyptian People and Elect a New One). He understood that Egyptian trade deficits were contributing to the huge demonstrations that led to the Egyptian coup. He wrote:

Starvation is the unstated subject of this week’s military coup. For the past several months, the bottom half of Egypt’s population has had little to eat besides government-subsidized bread, and now the bread supply is threatened by a shortage of imported wheat. Despite $8 billion of aid from Qatar and smidgens from Libya, Turkey, and others, Egypt is struggling to meet a financing gap of perhaps $20 billion a year, made worse by the collapse of its major cash earner — the tourist industry. Malnutrition is epidemic in the form of extreme protein deficiency in a country where 40% of the adult population is already “stunted” by poor diet, according to the World Food Program. It is not that hard to get 14 million people into the streets if there is nothing to eat at home.

He went on to point out that Egypt needs loans badly and will likely get them from the Saudis and the United Arab Emirates, whose leaders refused to bail out the Muslim Brotherhood for a good reason. As Spengler puts it:

The Saudi monarchy hates the Brotherhood the way Captain Hook hated the crocodile: it is the only political force capable of overthrowing the monarchy and replacing it.

The Saudis are a trade surplus country. They have been compiling huge foreign exchange reserves through their policy of pegging their currency to the dollar and buying all of the excess dollars in the foreign exchange markets that their oil exports earn.

Meanwhile, as a result of trade deficits, the Egyptian people need loans simply in order to eat. Those loans, in turn, drive up the exchange rate of the Egyptian currency, making it even less likely that Egypt will be able to develop its own food supply, or develop the exports it would need in order to buy imports without credit.

Egypt, Greece, Cyrprus, Portugal, Spain and Italy are all in the downward spiral caused by trade deficits. They are begging loans, but those loans won't help them recover, they'll just help them meet short-term needs. 

There are two tenets of modern mercantilism. One of them is that hoarded rreserves equal power. The modern mercantilists, including China, Russia, Japan, Saudi Arabia and Venezuela, maintain trade surpluses in order to gain power for themselves and destroy the power of their adversaries.

The second tenet of modern mercantilism is that by sacrificing consumption today they get more wealth and consumption in the future. Meanwhile, those to which they lend money gain extra consumption in the present, but at the expense of less consumption in the future.

Foreign loans come at a high price. They result in economic and political decline and make the receiver of the loans ever more dependent upon continuing loans. Unfortunately, many trade deficit countries find themselves in a position where their short-term needs require loans. They are willing to sacrifice their long-term prosperity and power in order to get a quick fix today.

Incidentally, the unrest in Egypt should be good for the United States. Saudi Arabia and the United Arab Emirates will be lending their reserves to the Egyptian people who will be spending them, often on American products. In the short-run, the dollar will fall and U.S. interest rates will rise, resulting in less consumption. but as U.S. trade moves toward balance, the U.S. will get more investment in its industries.

If the U.S. leadership ever decides to think long-term, it would enact a scaled tariff to balance trade. Requiring balanced trade would stop China, Russia, Japan and Venezuela and the other mercantilists from running intentional trade surpluses with the United States. Although we would get less consumption in the short run, we would get more consumption, more wealth and more power in the long-run.