Trade Deficit: Record High

America has a big problem: it imports far more than it exports. As a result, the United States is suffering from a massive and growing trade deficit (see graph). Last year, 2006, marked the fifth consecutive year that the trade deficit hit a new high, amounting to an incredible $764 billion. Even scarier is that, according to a statement by AFL-CIO (American Federation of Labor-Congress of Industrial Unions) Secretary-Treasurer Richard Trumka on the Release of the Annual Trade Deficit figures, “the imbalance between our imports and our exports is so enormous now that our exports would need to grow at least 53% faster than our imports just to keep the trade deficit from growing.” A trade deficit in general is not a bad thing. Most countries run a deficit; however a gap as large as the United States calls for special attention. Over the long run, the United States will have to repay its debts (with interest) and is likely to suffer a significant net wealth drain.

Because the trade deficit hit a historical high, the media has been investigating this issue quite heavily. And, it is an easily misunderstood issue. (I know this because there are so many opposing points-of-view). But, instead of reading more about how economists weigh in about this issue, I wanted to find out what average American citizens had to say; thus, I turned to the blogosphere. One blog that captured my attention reminded us that resorting to protectionism to fix the issue was not the solution; the other mulled over how the trade deficit was directly causing incredible job losses in the United States. My comments on both blogs can be found below.

Comment on Blog 1 on protectionism:

Mark, you make a very interesting point in your blog: restrictions on trade are restrictions on people. It is obviously true that we all contribute to the growing trade deficit in the United States by being so willing to buy goods made in other countries. I am personally a big supporter of textile imports: I buy clothes brands from other countries, and I buy from U.S. companies that outsource their labor in other geographies, such as Nike (pictured), to name one well-publicized example.

It is also clear that our imports and exports need to be more balanced than they are today in order to avoid an economic disaster in the future. The gap just cannot grow forever. But heavy-handed trade restrictions are not logical either. Is there a way to manage the trade gap and still avoid the consequences of protectionism and unrestricted free trade?

The devil is in the details, but only after the trade gap is significantly reduced. In the short-term, the United States needs to impose strong restrictions on trade because it needs to get itself out of the huge deficit hole that it has created and stop the momentum. That calls for protectionist policies. No one will be happy: trade partners will cry foul, and Americans will be hit with higher prices on a wide range of personal items, considerably reducing discretionary spending and potentially slowing our economy as a whole. But trade restrictions are required to right the ship and quickly close some of the trade gap. Ultimately, in the long-run, the United States’ deficit demands more attention and a delicate hand, similar to the way the Fed handles interest rates to mange inflation: a little adjustment here, a little there, and nothing gets too far out of whack.

Comment on Blog 2 on job loss:

Yes, the “trade deficit numbers may not be sexy.” However, your notion that the trade deficit directly causes job loss sends the wrong message, because it is easy for critics to cite evidence that we, as a country, easily live with a high deficit and low unemployment. Paul J. Samuelson of the Washington Post states that “from 1980 to 2006, the trade deficit jumped from $19 billion to an estimated $786 billion, or from less than 1 percent of gross domestic product to about 6 percent. Still, employment in the same period rose from 99 million to 145 million.” In a similar fashion, the monthly report from the U.S. Labor Department showed that the January unemployment rate dropped to a 4½-year low of 4.7% from 4.9%. The last time the rate was lower was in July 2001 when it was at 4.6 (see graph). During a time when the United States is suffering from the highest trade deficit in history, it is also operating with a historically low unemployment rate.

That is not to say that the trade deficit is a good thing for the economy, but there are many other reasons that can explain job loss: new domestic competition, new technologies, changing consumer tastes, and so forth. It is true that certain industries are affecting job loss in the United States due to the trade deficit and lower-wage competition abroad, for instance, every three months, 7 million to 8 million U.S. jobs disappear; but, roughly an equal or greater number of jobs are created in more technologically advanced industries. Trade is a relatively minor factor in job loss; it is just an easy scapegoat for critics.