“Good News” on the Trade Deficit?

Against a backdrop of a lot of negative economic news, the Commerce Department this morning reported the “good news” that the U.S. current account deficit shrank in the third quarter to $178.5 billion. The current account is the broadest measure of U.S. trade with the rest of the world, including not only goods and services but income from investments and unilateral transfers such as foreign aid.

I use scare quotes around “good news” because it isn’t really obvious why we should all be cheering a smaller current account deficit. Many of the same stories that hail an “improving” trade account also report that one of the main reasons behind it is the slowing U.S. economy compared to the rest of the world. Slower economic growth at home means less demand for imports, while faster growth abroad boosts the export of U.S. goods. I’m all for increased exports, but since when is slower domestic growth good news?

An interesting figure from the current account report is the flow of investment income. In the third quarter Americans earned $20 billion more in interest, dividends and profits on our investments abroad than foreigners earned on their investments in the United States. This despite the fact that foreigners own about $2.5 trillion more in U.S. assets than Americans own in assets abroad. The reason for the seeming discrepancy is that the assets we own abroad have a much higher return, while foreigners have (so far) remained content to earn a lower return on their more liquid and secure investments in the United States.

Opponents of trade liberalization constantly point to the trade deficit as evidence that U.S. trade policies are failing. We’ve debunked that claim at the Center for Trade Policy Studies, but perhaps one bit of genuine good news in today’s report is that critics of trade will have a slightly smaller target to aim at.