You're right, so many people just assume that premise without question-- thanks.
by Daniel T. Griswold
Daniel T. Griswold is associate director of the Cato Institute's Center for Trade Policy Studies.
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America's annual trade deficit, already large by historical standards, could reach a new record in 1998, fueling protectionist sentiment in Congress. Political fallout from the trade deficit numbers could impede efforts to reduce barriers to trade in the United States and abroad. Contrary to popular conception, the trade deficit is not caused by unfair trade practices abroad or declining industrial competitiveness at home. Trade deficits reflect the flow of capital across international borders, flows that are determined by national rates of savings and investment. This renders trade policy an ineffective tool for reducing a nation's trade deficit. A survey of America's major trading partners reveals no relationship between bilateral trade balances and openness to U.S. exports. For example, the U.S. runs a bilateral surplus with Brazil, which is relatively protectionist, while we run deficits with Canada and Mexico, which are almost totally open to U.S. exports thanks to the North American Free Trade Agreement. There is no connection between trade deficits and industrial decline. From 1992 and 1997, the U.S. trade deficit almost tripled, while at the same time U.S. industrial production increased by 24 percent and manufacturing output by 27 percent. Trade deficits do not cost jobs. In fact rising trade deficits correlate with falling unemployment rates. Far from being a drag on economic growth, the U.S. economy has actually grown faster in years in which the trade deficit has been rising than in years in which the deficit has shrunk. Trade deficits may even be good news for the economy because they signal global investor confidence in the United States and rising purchasing power among domestic consumers. What matters to the economy is not the difference between imports and exports but the extent to which Americans are free to benefit from the efficiencies, opportunities and consumer choice created in an economy open to world trade. |