I don't agree with it... but Robert Samuelson wrote what, I think, is a plausible argument for why we might be concerned about a growing trade deficit. To quote:
At present the greatest peril may lie in huge global trade imbalances -- and the financial pressures they create. The basic dilemma is that the world needs American trade deficits as an "engine" of growth, compensating for weak growth in Europe and Japan. But the same trade deficits may now be destabilizing because they send large amounts of dollars abroad. The danger: a dollar "crash" on foreign exchange markets that spills over into the U.S. stock and bond markets, driving down those markets and triggering a global recession.
This argument is not new -- I question the premise of a world needing U.S. trade deficits -- but he goes on to explain how this mechanism happens (which in my humble opinion is unique as most don't bother -- because they can't or because they don't want to expose their underlying assumptions):
What's the problem? Foreign exporters receive dollars for what they ship to the United States. If those dollars aren't reinvested in American assets -- say, U.S. stocks, bonds or Treasury securities -- they'll be sold on foreign exchange markets for other currencies: the euro, the yen, the pound. As dollar sales drive down its value, foreigners note that their existing U.S. stocks and bonds are worth less in their own currencies. So they may sell U.S. securities to limit losses. At the end of 2003, foreigners owned $1.5 trillion in U.S. stocks; widespread sales could trigger steep market declines.
The risk is an economic implosion. A sinking stock market could damage American consumer confidence and spending. Higher currencies for Europe and Japan could weaken their export competitiveness. (A higher currency tends to make a country's exports more expensive and its imports cheaper.) Together, the United States, Europe and Japan are half the global economy. If they went into recession, other countries might follow.
This seems a long chain of if's along a very slippery slope of an argument however... If I consider just the argument of widespread stock market panic selling due to dollar devaluation: People invest with the expectation of a return relative to their opportunity costs. While the devaluation of the dollar might make a stock less valuable in relative terms, the word relative invites us to ask "compared to what?" The price of a stock in large part represents its investors' forward call on its earnings potential. The U.S. continues to grow at a faster pace than every other country. It's not the short term now that investors (foreign or domestic) will consider -- the devaluation and current relative price are sunk -- what matters to them on the margin is tomorrow's value compared to the alternative available investments right now.
If you sell U.S. stocks and bonds you end up with U.S. dollars... what will you do with them? Convert them to Euros and invest in european companies growing at a slower rate -- and after this potential disaster will have even less appealing future opportunities? What's the point in that?
This all seems to have less to do with a trade deficit and everything to do with trade policies, savings rates, capital investment, innovation, etc., etc.
