The Good News behind This Morning’s Trade Deficit Report

This morning the U.S. Commerce Department reported another record deficit in the America’s broadest trade account with the rest of the world. In the July-September quarter of 2006, the U.S. current account deficit reached $225 billion, another record. The current account is the broadest measure of America’s international commerce, comprising not only trade in goods and services but also income flows from foreign investment and unilateral transfers such as foreign aid worker remittances.

The report is bound to throw more fuel on the debate over U.S. trade policy. Here’s how the Associated Press described the political fallout from the latest trade numbers:

“Democrats, who took over control of the House and Senate in the November elections, attacked President Bush’s trade policies, charging that the administration has run up record deficits for five straight years by failing to protect U.S. workers from unfair foreign trade practices.” 

To all this hand-wringing about the trade deficit, I say, “Bah Humbug.” The trade deficit itself tells us very little about the success or failure of U.S. trade policy. It is largely driven by differing rates of savings and investment in the United States and our major trading partners. (Check out http://www.freetrade.org for the details.)

Obsession with the trade deficit also obscures the real story behind this morning’s trade numbers: Both our imports and exports are rising at a healthy rate.

Compared to the third quarter of last year, U.S. imports of goods and services from the rest of the world are up 12.7 percent while our exports are up an even steeper 14.1 percent. America’s total two-way trade with the world, including income from investments, is up a spectacular 16.4 percent from a year ago. Imports, exports and investment income have all reached record levels.

The bottom line: Despite the complaints of politicians, Americans have never earned or spent a higher share of their income in the global economy than we do today. We are voting with our dollars every day for more trade and globalization.