It’s the ticking time bomb that never goes off.
For a couple of decades, economists have warned about the rising U.S. trade deficit–the difference between what Americans import and export. The trade deficit is worsening! It’s unsustainable! It’s a dire threat to the economy!
On Friday came the news that the trade deficit actually has declined a little, as oil prices moderated. But it still clocked in at the second highest level ever–$50 billion for the month of July.
You might think every economist views the trade deficit as a negative. After all, what could be good about any kind of deficit?
In fact, plenty of contrarians have concluded that trade deficits not only pose little risk to the economy, but also may well be a sign of strength.
For starters, the trade deficit isn’t a perfect measuring tool. While most nations tax imports, and thus count them pretty closely, export numbers involve guesswork. Plus, not all economic activity fits neatly into either category. Just try putting a value on all the money-making ideas–intellectual property–that cross borders.
Even the name of this particular indicator is somewhat misleading. In reality, it has little to do with trade policy.
Rather, the trade deficit reveals quite a bit about global investment flows, and the relative strengths of economies and currencies. It shows that Americans are buying a lot of stuff from overseas, and foreigners in effect are loaning us the money, in the form of their investments here, to pay for it. To some, that suggests Americans are living beyond their means, borrowing money from abroad to fuel excessive consumption.
In reality, it shows that Americans are getting a good deal by virtue of having the world’s dominant economy. Foreigners have faith in the strength of U.S. commerce. This is where the action is, so naturally they want to lay their bets here. They’re willing to accept a low return at the outset in the belief that owning U.S. Treasuries and the like will pay better in the long run than similar investments in other nations. Given that dynamic, trade deficits aren’t so bad.
The other reality check for deficit doomsayers concerns the mediocre performance of some countries with trade surpluses. Japan springs to mind: For years, it reported huge surpluses with the U.S. while its economy was sinking. Surpluses didn’t do the Japanese a lot of good. The European Union runs surpluses, too, and yet has high unemployment and sluggish growth.
In the U.S., trade deficits have tended to rise when the economy is going strong. Nevertheless, no number gets misused to a greater degree in the debate about free trade. It’s trotted out as evidence that more protectionism is needed, which in the long run hurts everybody. Trade deficit hawks also assert that since the imbalance allows foreign governments to load up on U.S. securities, those nations must have undue influence over us. Don’t worry–Americans still hold by far the most U.S. assets.
The cure for trade deficits is pretty simple: provoke a dollar crisis, throw the country into recession and shut the borders to trade. That would take care of it, pronto. Of course, that cure would be worse than the supposed disease. When trade deficits ballooned in the mid-1980s, alarmists warned of America’s impending decline. It didn’t turn out that way then, and it won’t now.
