[lehighguy]

Balance of Payments must always equal zero. Different parts of the BoP may be positive or negative, but they must all add up to zero. That is why it is called a "balance".

Example:
If the US has a $300Bln trade deficiet it must acquire that $300Bln from the sale of assets to foriengers (usually treasuries to Asian central banks).

It is a common believe that our trade deficiet it the result of price differentials in labor and other factors of production. However, this raises the question as to why other industrialized countries with higher labor costs (Japan, Europe) have little problem maintaining flat or positive trade balances. To understand why we have to start with the asset flows rather then the trade balance.

The US has a laughably low savings rate. In order for it continue investing in new technologies and industries it must acquire capital from abroad. Since it is running a surplus in capital flows, it must run a deficiet in the trade balance in order for BoP to balance. So really it is our inability to save that leads to trade deficiets. Main culprits in this are:
1) Spend happy deficiet happy congress and president.
2) Low real interest rates.
3) Loose credit policy.
4) Taxation of investment income.
5) American culture of consumer spending.

Correcting those things would go much farther to correcting the US trade deficiet then anything else.

P.S. The trade deficiet is based on physical goods only. It doesn't include services, in which the US runs a surplus. There is another figure that includes services, but I don't remember what it was.