The Good News behind Today’s Trade Deficit Report

America’s broadest trade account reached another record deficit in 2006, according to a report this morning from the U.S. Commerce Department. The U.S. current account deficit reached $857 billion last year, which will predictably unleash a lot of wailing and gnashing of teeth in Washington today about the alleged failure of U.S. trade policy and the menace the deficit poses to U.S. economic growth.

The deficit doomsayers are wrong yet again. Far from being a sign of failure, today’s report contains a lot of good news if you care about the freedom of Americans to engage in international commerce. U.S. exports of goods and services last year were up by 12.7 percent from 2005, and imports grew by 10.5 percent, stoked by strong demand from American consumers and producers alike. Driving the record deficit last year were continued inflows of foreign capital, including a 67 percent jump in foreign direct investment. Growing levels of trade and foreign investment have boosted U.S. growth, job creation, and rising real wages.

As I have argued for a long time now, the trade deficit does not mean what our politicians and cable commentators keep telling us it means. For example, in a Free Trade Bulletin of mine published this week, I found no evidence that rising trade deficits are associated with slower economic growth. In fact, more robust economic growth typically translates into a rising current account deficit. 

If the expanding current account deficit is a drag on growth, somebody forgot to tell the U.S. economy.