Monday, April 11, 2011

Destroying the Myth that Trade Deficits Are a Drag on the US Economy

As I've repeatedly noted on this blog, a rampant misunderstanding of the US trade deficit drives much of the public criticism (and fear) of American free trade policies.  Those who propagate this misinformation - e.g., journalists, politicians, private sector advocates and policy wonks - do so out of either simple ignorance or willful disregard for the truth.  Sadly, it's far more often the latter than the former, so that's why studies like the brand new one from Cato's Dan Griswold are absolutely essential to dismantling the all-too-widely-accepted protectionist myth that the US trade deficit is a harbinger of economic doom.

In "The Trade-Balance Creed: Debunking the Belief that Imports and Trade Deficits Are a "Drag on Growth," Griswold argues (emphasis mine):
A nearly universal consensus prevails that the goal of U.S. trade policy should be to promote exports over imports, and that rising imports and trade deficits are bad for economic growth and employment.

The consensus creed is based on a misunderstanding of how U.S. gross domestic product is calculated. Imports are not a "subtraction" from GDP. They are merely removed from the final calculation of GDP because they are not a part of domestic production.

Contrary to the prevailing view, imports are not a "leakage" of demand abroad. In the annual U.S. balance of payments, all transactions balance. The net outflow of dollars to purchase imports over exports are offset each year by a net inflow of foreign capital to purchase U.S. assets. This capital surplus stimulates the U.S. economy while boosting our productive capacity.

An examination of the past 30 years of U.S. economic performance offers no evidence that a rising level of imports or growing trade deficits have negatively affected the U.S. economy. In fact, since 1980, the U.S. economy has grown more than three times faster during periods when the trade deficit was expanding as a share of GDP compared to periods when it was contracting. Stock market appreciation, manufacturing output, and job growth were all significantly more robust during periods of expanding imports and trade deficits.

The goal of U.S. trade policy should not be to promote exports at the expense of imports, but to maximize the freedom of Americans to trade goods, services, and assets in the global marketplace.
Indeed.  Griswold, of course, supports all of these arguments with oodles of verifiable data - something his opponents rarely, if ever, provide.  (I especially like the table on page 9, which undeniably supports, with US government data, the bolded passage above.)  So it goes without saying that I highly recommend reading the whole study.  It's well worth your time.

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