Blog Post

AEIdeas

The US persistently runs trade deficits, Japan trade surpluses (all of which is here represented by current account balance as a share of GDP).

Yet what many trade hawks might find surprising is how the two economies have performed over the past 20 years. Back in 1994, US per capita GDP was about $7,000 higher. Today it’s $14,ooo. This might especially surprise politicians who view the trade balance as the key factor in economic growth. (The US also tends to have major job gains when the trade deficit is rising.) As economist Douglas Irwin points out in Foreign Affairs:

To make their case that trade isn’t working for the United States, critics invoke long-discredited indicators, such as the country’s negative balance of trade. “Our trade deficit with China is like having a business that continues to lose money every single year,” Trump once said. “Who would do business like that?” In fact, a nation’s trade balance is nothing like a firm’s bottom line. Whereas a company cannot lose money indefinitely, a country — particularly one, such as the United States, with a reserve currency — can run a trade deficit indefinitely without compromising its well-being. Australia has run current account deficits even longer than the United States has, and its economy is flourishing.

Let me also add this from my colleague Claude Barfield: