Howling at the Trade Deficit

The latest figures reveal that Americans bought $12.1 billion more in goods and services from abroad in February than they sold, the highest monthly trade gap since the government began issuing monthly figures in 1992. An Associated Press report on the new numbers called the trade deficit “the biggest problem facing an otherwise stellar U.S. economy” and predicted that the deficit “is likely to grow much worse as the year progresses,” given the economic slowdown in Asia.

Contrary to the common spin, trade deficits are not necessarily bad news. A trade deficit can even be good news for an economy, reflecting flush consumers and an attractive climate for investment.

America’s continuing trade deficit has nothing to do with lack of industrial “competitiveness” in the United States or unfair trade barriers abroad. The deficit reflects a net inflow of capital from abroad, which allows Americans to buy more goods and services on the international marketplace than they sell. It’s as simple as that.

February’s trade numbers did contain bad news, not because imports exceeded exports, but because both imports and exports fell. The weakness of U.S. exports stems directly from the economic slowdown in Japan and the rest of East Asia. Their economic troubles are spilling over to the United States, hurting American exporters. This only confirms that trade is not a zero-sum game. The economic success of our trading partners enhances our success, and their troubles add to our troubles.

The February numbers revealed a growing bilateral trade deficit with Japan; according to the Associated Press, it has “stirred alarm” in the Clinton administration. But it is Japanese officials who should be alarmed. The growing trade gap with Japan reflects the continuing weakness of Japan’s economy and America’s relative health. If the trade deficit is such bad news for the United States, would those who worry about it prefer that we swap economies with Japan?

In his new book-length tirade against free trade, Patrick Buchanan calls the trade deficit “a cancer” on the American economy. If the nation’s recent economic performance is any guide, the trade deficit is not a symptom of mortal illness but rather the rosy glow of economic health. Since 1992, while America’s trade deficit has tripled, industrial production has grown by 24 percent and manufacturing production by 27 percent. Unemployment has fallen to a quarter-century low, and manufacturing employment has grown by 600,000.

Trade deficits are not a drag on growth. Since 1980, in the six years in which the overall current account deficit has shrunk, growth of the U.S. gross domestic product has averaged 2.0 percent. In the 11 years in which the current account has grown (that is, “worsened”), growth has averaged 3.1 percent. If trade deficits are such bad news, why does our economy grow 50 percent faster in years in which the deficit grows larger?

The key trade statistic is not exports minus imports but exports plus imports. If America is trading less with the world, then we should start to worry. Declining exports and imports, not the trade deficit, are what should trouble us about the latest trade figures.

The trade deficit is only bad news because so many reporters and politicians believe it is bad news. Misunderstanding of the trade deficit fuels protectionism. It tempts politicians to seek a “solution” (such as raising tariffs) to a nonexistent problem. A protectionist response to the trade deficit would only succeed in driving up the value of the dollar (by depriving foreigners of the dollars they would earn by importing to the United States). The stronger dollar in turn would curb U.S. exports, driving down total two-way U.S. trade while leaving the trade deficit largely unchanged. America would be poorer.

The only sure way to bring down the trade deficit quickly would be for the United States to engineer its own economic crisis. We could follow the East Asian model that has done so much to shrink trade deficits and expand trade surpluses across the Pacific. A plunging dollar, an exodus of capital, a shrinking GDP and falling real wages would make a big dent in the U.S. trade deficit, not to mention our pocketbooks.