Trade Deficit: Obsessing Over a Misleading Indicator
The trade deficit is my favorite candidate for the most misleading indicator in our statistical tool kit. More often than not, bad news for the economy is good news for the trade deficit, and vice versa. In 1992, the economy was in recession and our trade deficit came down. The next year, our economy revived and the trade deficit rose.
More recently, our trade with South Korea furnishes a similar and more dramatic example of the relationship between trade and the economy. In 1996, the United States enjoyed a trade surplus with Korea (approximately $330 million a month). Korea's economy was expanding more rapidly than ours and our exports to that nation were a third larger than our imports.
In 1997, however, their currency and stock market crashed, and their economy declined sharply. Korea got rid of its trade deficit with us overnight (we now have a trade deficit with them, over $600 million in March 1998). If we try to reduce our imports from Korea, that would make it more difficult for that nation to return to normal.
We also pay too much attention to the much larger trade deficit with Japan. It is a statistical artifact resulting from the fact that we have the largest population in the industrialized world. The average Japanese spends more on US products ($538 in 1996) than the average American spends on Japanese products ($432 in 1996). But we have a much larger population, so our total exports to Japan are less than our imports from that country.
The trade deficit is a misleading indicator of economic success, but we should not ignore it. When we look beyond the short-term gyrations of the trade balance and the business cycle, there is a more fundamental and longer-term problem that does involve the trade deficit. It is a symptom of a more basic economic imbalance.
Stripping away the economic jargon, Americans invest more than we save. How do we finance our vast array of new and expanded factories, offices, and laboratories so essential to economic growth? By importing foreign capital. What do we do with the foreign money? We buy their goods and services - and the result is a substantial trade deficit.
We can reduce the trade deficit in a constructive and sustainable manner - not by erecting barriers to imports or subsidizing exports - but by encouraging Americans to save more. That will provide at home more of the funds needed to finance economic growth. Balancing the federal budget is an important step because it eliminates a major source of dis-saving. The Treasury is no longer a net borrower, so more private saving is now available to finance private investment. More can be done.
Congress has already embarked on an effort to increase saving through tax reform, such as the Roth IRAs. We should go all the way and defer all saving from taxation. This means deregulating the saving process so that Uncle Sam no longer tells Americans how much to save or the exact form in which to save.
We tend to overlook the positive effects of imports. They benefit consumers by providing greater product variety at lower prices. Imports also spur our companies to enhance their competitiveness by lowering costs and improving quality.
Trade deficits also remind us that economic progress produces losers as well as winners. The challenge is how to help those who are hurt by progress without undermining that progress.
Concern for those not sharing in the general progress requires a constructive response. We need to make the US a more attractive place to hire people and to do business. The basic answer to low-priced import competition is not to "dumb" down jobs here but to raise the skills of Americans who have difficulty in finding good jobs.
The trade deficit should not be the focus of economic policy; it mainly is a side effect. We should not be so preoccupied with the statistical excess of imports over exports that we adopt policies that weaken the basic strength of our high-performance economy.
* Murray Weidenbaum is chairman of the Center for the Study of American Business at Washington University in St. Louis.