Blog Post

AEIdeas

Some presidential candidates argue that a big US trade deficit is bad for America. Yet there’s no valid correlation between trade deficits and unemployment over the past 40 years. As AEI’s Derek Scissors has written: “When jobs are plentiful and wages rise, Americans buy more of everything, including imports. When the economy is weak, Americans buy less of everything, including imports.”

In other words, macro factors matter. A similar point was made in the WSJ today by Alan Blinder:

Most fundamentally, but least understood, a nation’s overall trade balance is determined by its domestic decisions, not by trade deals. Think about the accounting involved here. As noted above, borrowing from abroad is the bookkeeping counterpart of running a trade deficit. One implies the other. The amount we borrow from abroad must equal the gap between our total spending as a nation (including government spending) and our total income (including the government’s income from taxation). Spendthrift nations like the U.S. have trade deficits because we don’t save much. But these saving decisions are domestic; they do not derive from trade agreements. America’s chronic trade deficits stem from the dollar’s international role and from Americans’ decisions not to save much, not from trade deals. Trade deficits are not a major cause of either job losses or job gains. But some people do lose their jobs from shifting trade patterns; and the government should do more to help them. Importantly, trade makes American workers more productive and, presumably, better paid.

And from my recent podcast, AEI’s Claude Barfield:

Pethokoukis: Why are US trade deficits so darn big, hundreds of billions of dollars a year, every year? Are they a sign of economic weakness? Barfield: Well, I think you have to start out with is that our trade deficit or current account deficit with the rest of the world and not with one country. We’ve had trade deficits for the last four decades because of a simple macroeconomic fact: If you don’t save enough – and that’s both government saving and government having a surplus and the private sector or individuals saving more than they consume — then you total that up, if you don’t have enough, somebody will do it for you and the people to do it for you are those who sell us goods. We have not for 40 years been able to put our own macroeconomic house in order. And so before you get to China or Japan or Europe’s individual trade deficits, you’d make the point that overall, in a given year, if that’s the case, we will be running a trade deficit with someone. If it’s not with China, or if the China deficit were to go down, it would go up somewhere else because that’s really the background fact. And it doesn’t really betoken either weakness or strength. I think in the United States’ case, the times we’ve had that’s the biggest trade deficits are times when we actually have been growing at a faster rate and consuming more than the rest of the world.