America’s chronic trade deficit continues to set new records,both for its sheer size in nominal terms and for its share of anexpanding gross national product. The record deficit is fuelingworry that it could hurt U.S. industry, destroy jobs, burden futuregenerations, and cause the current economic expansion to end in a“hard landing.” But those worries rest on a fundamentalmisunderstanding of the causes and consequences of the U.S. tradedeficit.
In November 2000 the congressionally appointed Trade DeficitReview Commission issued its final report, The U.S. Trade Deficit:Causes, Consequences and Recommendations for Action. The reportreflected the views of a sharply divided commission, withDemocratic appointed members warning of the dangers of the deficitwhile Republican appointed members emphasized its more benignnature.
Economic theory and experience demonstrate that trade deficitsare driven primarily by macroeconomic factors, in particularinvestment flows, and not by allegedly unfair trade barriers ordeclining industrial competitiveness.
Because of the link between trade deficits and risinginvestment, larger trade deficits are typically accompanied byimproving economic conditions. A survey of the U.S. economy since1973 confirms that, by almost any measure – economic growth,employment, industrial production, poverty reduction – the economyhas performed better in years in which the trade deficit rose thanin years in which it shrank.
America’s annual trade deficits are sustainable as long as theUnited States remains a safe and profitable destination for theworld’s savings. The accumulating net foreign ownership of U.S.assets, America’s socalled foreign debt, does not threaten oursovereignty, our ability to finance that investment, or continuedeconomic expansion.
The best policy response for the new administration and Congresswould be to ignore the U.S. trade deficit as a target of policy andconcentrate instead on maintaining a strong and open domesticeconomy that welcomes foreign investment.