So Trade Deficits Don't Matter?

In December 2002 the trade deficit was $44.2 billion. As NPR reported, this was a record. So was the annual trade deficit.

But National Review has decided that the U.S. trade deficit was good news:

Leaving aside the particular debate about the December numbers, recent data indicate that the trade balance tends to move in the opposite direction of growth in GDP. In other words, when the trade balance goes down (deeper deficits) the growth in GDP goes up. .... [F]rom 1997 until December of 2002, the trade balance and the U.S. economy have moved in almost exact opposite directions. This suggests that deficits tend to correlate with economic growth.

In the view of National Review, the record trade deficit was the result of fast growth. It would be too cruel and simple to point out that the United States did not have good growth in 2002, a year in which the economy lost jobs and the unemployment rate averaged 5.8 percent. But we should be more polite and look at the logic of the claim.

If the U.S. has a trade deficit, it means that it is buying more goods from abroad then it is selling. The imports, by definition, provide a benefit. The items being imported must be cheaper or better than the competing goods that are produced in the United States. On the negative side, the producers of the competing goods -- such as auto workers or textile workers -- are hurt, because the imports mean lost jobs or lower wages. Of course, if you don't work in these industries then the short-term effect is positive, since imports raise your standard of living.

The situation would be different if professional restrictions didn't protect doctors, lawyers, accountants and other highly paid professionals from the same sort of international competition than U.S. manufacturing workers experience. If we could hire well-trained physicians or lawyers from China and Mexico and pay them $50,000 a year, then the story of winners and losers from trade would be very different. But, powerful professional lobbies maintain barriers that limit competition from highly skilled workers in developing nations.

The other problem with the trade deficit is the long-term one. The United States must borrow to finance the trade deficit. It does this by selling financial assets such as bonds and stocks to foreigners. It is possible to borrow $500 billion, as the country did in 2002, to finance a large trade deficit that lasts a short period of time -- just as the U.S. could run a budget deficit of this size for a year or two. But, if the deficit stays at this level, the situation quickly spirals out of control.

If the trade deficit remains constant as a share of GDP, the net foreign indebtedness of the United States will exceed $10 trillion by 2011. It will be larger than out GDP by 2019. At that point, we will be running out of financial assets to sell foreigners, they will already own our whole stock market, much of our government debt, and many of our home mortgages. The National Review may consider this a great future, but it is unlikely that many others would agree.