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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

September 4, 2013 at 11:33 AM

A guide to the trade deficit

The Commerce Department reported that the trade deficit rose 13.3 percent in July. And before you yawn and flee to the sports section, it’s worth digging into this data. Officially known as the U.S. International Trade in Goods and Services report, it is invariably shortened to “the trade deficit.” We buy more from overseas than we sell. Thus, America sold $189.4 billion to the world, but we imported stuff worth $228.6 billion.

It’s hard to believe that the United States ran a trade surplus for decades. Small deficits began to show up in the 1970s as oil imports grew, inflation disrupted the economy and Japanese imports began to gain a major foothold. But the big-number trade deficits began in 1984 and have continued to grow, except during recessions.

fredgraph

Is this good or bad? It’s good if you believe in the world trading system created by the United States out of the ashes of World War II. The idea being that liberalized trade, with all nations lowering barriers and playing by the same rules, promoted peace. The result gave Americans a cornucopia of goods at low prices, and in many cases helped raise the standards of living in nations around the world. And American exports have grown dramatically — something especially beneficial to a state such as Washington. But as the world’s most prosperous market, we have bought more than we sold.

The trade deficit is bad to the degree that it represents stealth trade barriers keeping out American goods — and the loss of millions of American jobs. The deficit can’t be divorced from 20 years of managed trade agreements, from NAFTA to KORUS, all sold on the promise that they would reduce the deficit but the opposite has happened. Companies have moved manufacturing offshore. Cheaper goods have also meant lower wages and fewer jobs at home. As late as the 1990s, about half of all apparel sold in the United States was made here. After the last protection for the industry lapsed in the early 2000s, the number today is about 2 percent. Those decent jobs in the rural Southeast are now gone. Alan Tonelson of the U.S. Business and Industry Council does a deep dive into the downside of the latest report.

With a healthy, competitive economy, a trade deficit isn’t necessarily bad. If those dollars come back here as foreign direct investment, taking advantage of American investments in education and infrastructure, it’s a net good. This happened in the 1980s and 1990s. As the economy becomes more concentrated and focused on finance and “rent seeking,” those dollars are used less constructively — or sit in foreign central banks. Conversely, America’s huge balance of payments surplus in the 1920s against a prostrate Europe was no advantage — and played a significant role in the Great Depression.

So the monthly trade deficit represents a complex calculus of winners and losers. Hopes that the trade situation might “reset” after the Panic of 2008 were another pipe dream. As to the sustainability of the deficit, it’s been growing for 30 years with consequences that are real — lost jobs and industries, contributing to inequality — but not disastrous. Policymakers are committed to the current trade paradigm as essential to Pax Americana. And so it goes. Great Britain, another free-trading nation that bestrode the world a century ago, was also convinced such policies kept the peace. Nations that traded didn’t go to war with each other. Unfortunately, that proved to be wrong in August 1914.

And Don’t Miss: The decline of paid vacations | NY Times

Today’s Econ Haiku:

Bezos toured the Post

Will those hallowed doors be turned

Into newsroom desks?

Comments | More in Trade | Topics: Trade deficit

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