News Release

February 9, 2001

Record trade deficit is nothing to fear
Anxiety rests on misunderstanding of deficit's causes and consequences, study says

WASHINGTON—Later this month, the Commerce Department will announce that the annual U.S. trade deficit has set another new record, fueling worry that it could seriously injure the domestic economy. But according to a new study by the Cato Institute, trade deficits are a sign of strength, not a cause for worry. The real danger lies in any attempt by the new administration or Congress to "fix" the trade deficit.

In "America's Record Trade Deficit: A Symbol of Economic Strength," Daniel T. Griswold, associate director of the Cato Institute's Center for Trade Policy Studies, finds that "the worries of policymakers, economic commentators, and critics of American trade policy rest on a fundamental misunderstanding of the causes and consequences of the U.S. trade deficit. Deficits are driven primarily by macroeconomic factors, in particular investment flows, and not by allegedly unfair trade barriers or declining industrial competitiveness." The report's detailed economic analysis refutes the most common allegations made about the deficit:

• Trade deficits do not cause poor economic performance; rather, they typically accompany improving economic conditions. A survey of the U.S. economy since 1973 confirms that, by almost any measure-economic growth, employment, industrial production, poverty reduction-the economy has performed better in years in which the trade deficit rose than in years in which it shrank.
• Overall and bilateral trade deficits are not the cause of net job losses in the U.S. economy. During years of rising deficits, the unemployment rate has fallen by 0.4 percent. Claims that agreements such as PNTR with China will cost hundreds of thousands of jobs are based on faulty analysis.
• The trade deficit does not lead to "deindustrialization." In fact, the growth of real goods imports and manufacturing output tend to be positively correlated. That is, as manufacturing output rises in the United States so do imports of goods, adjusted for price changes.
• America's annual trade deficits are sustainable as long as the United States remains a safe and profitable destination for the world's savings. The accumulating net foreign ownership of U.S. assets-America's so-called foreign debt-does not threaten our sovereignty, our ability to finance that investment or our continued economic expansion.

America's current economic slowdown lends credence to this analysis, Griswold asserts. "In the last few months, almost every major economic indicator is down, and the monthly deficit figures have fallen right along with them," he says. "Proponents of smaller deficits should be careful what they wish for; they might just get it."

"America's Record Trade Deficit: A Symbol of Economic Strength"