America's enormous trade deficit has become a political issue. To Pat Buchanan, the deficit "is a cancer. Either we cut it out or it will kill America." Federal Reserve Chairman Alan Greenspan, on the other hand, believes the deficit has curative powers. He has told Congress that America's receptivity to imports has helped stimulate economic growth in Asia and Latin America and helps maintain U.S. prosperity by keeping inflation low (because competition from imported goods discourages U.S. producers from raising prices).
So which is it: disease or cure- or neither? At first glance, the statistics look scary. America's trade deficit in goods and services rose to a record $168.6 billion in 1998- a 53-percent increase from 1997. And the 1998 merchandise trade deficit was 248 billion- a 25-percent increase from the year before. But while the trade deficit is undeniably large and growing, it remains less than 2 percent of Gross Domestic Product (GDP) adjusted for inflation. This is a smaller percentage of GDP than in the mid-1980s, when the deficit peaked at around 3 percent of GDP.
In truth, the trade deficit tells us far less about the health of the economy than the hyperpoliticized discussion of it would suggest. Technically, the only thing that growing trade deficit overtly tells us is that the U.S. economy is consuming more than it is producing. But beyond that it gets complicated. Many Americans are concerned about the trade deficit's impact upon jobs and long-term economic growth. This makes sense because some American workers have been hurt by foreign competition; producers of goods and services overseas could in theory put domestic producers out of work. But the relation among trade deficit, jobs, and economic growth is complex. When U.S. unemployment is low, as it is today, the trade deficit is often high- a strong U.S. economy creates both domestic jobs and demand for foreign goods. When unemployment is high, the trade deficit tends to decline- a recession can diminish both the demand for jobs in this country and the demand for imported goods. In short, Americans buy more goods (including imports) when the economy is doing well and buy fewer goods of any sort when the economy is sluggish.
Still, Americans clearly remain ambivalent about the policy implications of the trade deficit. In 1995 the Michigan polling firm EPIC/MRA polled 999 active voters and found that 69 percent believed that the United States should impose increased tariffs on countries- such as Japan, Mexico or Canada- running trade surpluses with the United States. And 54 percent of those polled favored tariffs on countries that paid their workers low wages, apparently believing, with Pat Buchanan, that foreign companies "will swallow a tariff rather than risk losing their U.S. market." Three years later, however, in May 1998, another EPIC/MRA poll found that 83 percent of respondents believed competition from imports keeps U.S. manufacturers on their toes and that 74 percent of respondents believed lower- priced imports help keep products affordable for lower- income families. Based on these polls, the public seems to believe both that protective tariffs help shield U.S. producers from unfair foreign trade and that relatively free-flowing imports help make markets more equitable as well as more efficient- which pretty accurately captures the complexities of imports and trade deficits.
But the question remains: Is protectionism the correct response to America's trade deficit? Although economists generally agree that protection can help certain sectors, it is not clear that protection can improve the economy as a whole or the welfare of citizens. Moreover, protectionism favors certain sectors of the economy over others. To justify such tailored intervention, protectionists argue that foreigners are treating Americans unfairly and that the federal government should therefore intervene to protect U.S. producers from unemployment or lost opportunities. This is, in some cases, sound policy. But in our globalizing economy, is it equitable for U.S. policy makers to deny imports, jobs, and a potentially rising standard of living to citizens of other nations?
Contrary to what the Buchanans of the world say, the trade deficit is not a sign from the gods that America's economy will soon falter. Nor, pace Greenspan, is it necessarily an unmitigated sign of good economic health. But if President Clinton is to forge a new consensus on trade- and he has said he would like to- a good place to start would be by discussing the trade deficit.
