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ByDanielGriswold
April20,1998

mericasannualtradedeficit,alreadylargebyhistoricalstandards,could

reachanewrecordin1998,fuelingprotectionistsentimentinCongress.
Politicalfalloutfromthetradedeficitnumberscouldimpedeeffortsto

reducebarrierstotradeintheUnitedStatesandabroad.
Contrarytopopularconception,thetradedeficitisnotcausedbyunfairtrade
practicesabroadordecliningindustrialcompetitivenessathome.Tradedeficitsreflect
theflowofcapitalacrossinternationalborders,flowsthataredeterminedbynational
ratesofsavingsandinvestment.Thisrenderstradepolicyanineffectivetoolfor
reducinganationstradedeficit.
AsurveyofAmericasmajortradingpartnersrevealsnorelationshipbetweenbilateral
tradebalancesandopennesstoU.S.exports.Forexample,theU.S.runsabilateral
surpluswithBrazil,whichisrelativelyprotectionist,whilewerundeficitswithCanada
andMexico,whicharealmosttotallyopentoU.S.exportsthankstotheNorth
AmericanFreeTradeAgreement.
Thereisnoconnectionbetweentradedeficitsandindustrialdecline.From1992and
1997,theU.S.tradedeficitalmosttripled,whileatthesametimeU.S.industrial
productionincreasedby24percentandmanufacturingoutputby27percent.Trade
deficitsdonotcostjobs.Infactrisingtradedeficitscorrelatewithfalling
unemploymentrates.Farfrombeingadragoneconomicgrowth,theU.S.economy
hasactuallygrownfasterinyearsinwhichthetradedeficithasbeenrisingthanin

yearsinwhichthedeficithasshrunk.Tradedeficitsmayevenbegoodnewsforthe
economybecausetheysignalglobalinvestorconfidenceintheUnitedStatesandrising
purchasingpoweramongdomesticconsumers.
Whatmatterstotheeconomyisnotthedifferencebetweenimportsandexportsbut
theextenttowhichAmericansarefreetobenefitfromtheefficiencies,opportunities
andconsumerchoicecreatedinaneconomyopentoworldtrade.
Introduction
Oneofthemostpoliticallyvolatileconsequencesofthefinancialandeconomicturmoil
inthePacificRimwillbearisingU.S.tradedeficitin1998.Plunginggrowthratesin
theregionwillmeanlessdemandforU.S.exports,whilefallingforeigncurrency
valueswillmakeAsiasexportstotheUnitedStatesmoreaffordable,spurringdemand
byAmericanconsumers.Theresult,widelypredictedbyeconomists,willbea
mercantilistsnightmare:agrowinggapbetweenthevalueofthegoodsandservices
weimportandthevalueofwhatweexport.TheU.S.merchandisetradedeficitin1998
couldapproach$250billion,breakingtherecordof$198.7billionjustsetin1997.(1)If
thepastisanyguide,thegrowingtradegapwillfuelanguishinthenewsmediaand
protectionistsentimentsinCongress.
Wheneverthegovernmentannouncesarecord,orjustarising,deficit,themedia
routinelydeclarethebadnewsthatthetradegaphasworsenednomatterhow
goodtheaccompanyingeconomicnewsmaybeoninflation,employment,andgrowth.
MediareportsweretypicallygloomyinFebruarywhentheCommerceDepartment
reporteda$114billiontradedeficitfor1997,thelargesttradegapsince1988.On
February19,thedayofthereport,DanRatherannouncedonCBSNewsthatthe
governmentsaysthe1997U.S.tradedeficitwastheworstinnineyears.(2)Thesame
day,LouDobbs,hostofCNNsMoneylineprogram,said,Webegintonightwith
todaystroublingreportontrade,areportthatshowedthenationstradedeficitsoared
by24percentinDecember.(3)Thenextday,theWallStreetJournaladdeddarkly
that1998couldshapeuptobeanevenmoredismalyearfortradethan1997.(4)

Noaspectofinternationaltradeistalkedaboutmoreandunderstoodlessthan
Americasperennialtradedeficit.Criticsoffreetrade,andmostAmericansforthat
matter,believethetradedeficitisprimafacieevidencethatAmericancompaniesare
failingtocompeteinglobalmarketsorthatU.S.exportersfaceunfairtradebarriers
abroad,orboth.Theobviousimplicationisthat,ifothernationsweretoopentheir
marketsaswideaswehavesupposedlyopenedours,orifAmericancompanies
becamemorecompetitiveagainstforeignrivals,wecouldexportmorerelativeto
imports,thusreducingthetradedeficit.
Thepopularthinkingontradedeficitsissimple,appealingandwrong.Tradedeficits
arenotdeterminedbythemicroeconomicsoftradepolicyorindustrial
competitiveness.Theyreflectunderlyingmacroeconomicfactors,specifically
investmentflowsand,ultimately,thenationalratesofsavingsandinvestmentthat
determinethoseflows.TherecentexperienceoftheUnitedStatesanditstrading
partnersconfirmsthisconclusion.
Understandingthetradedeficithasprofoundimplicationsforournationaldebate
abouttrade.WecannotreducetheU.S.tradedeficitbyrestrictingimportstothe
Americanmarketorbypersuadingorbullyingothergovernmentstolowerbarriersto
theirmarkets.Wecannotreducethetradedeficitthroughgovernmentdirected
industrialpolicy,managedtrade,orexportsubsidiesaimedatboostingnational
competitiveness(howeveronedefinestheconcept).And,contrarytotheheadlines,
tradedeficitsarenotnecessarilybadnewsfortheU.S.economy.Theymayevenbe
goodnews.
CurrentAccounts,CurrentControversies
Americanshaverunanannualtradedeficitingoodsandserviceswiththerestof
worldineveryyearsince1976.Thatunbrokenstringofdeficitshascoloredmuchof
thetradedebateintheUnitedStatesinthelasttwodecades.
Beginningintheearly1980s,annualU.S.tradedeficitsreachedunprecedentedlevels.
Afterdecadesofpostwarsurpluses,theU.S.tradedeficittopped$100billionin1984
andpeakedatarecord$153billioninfiscalyear1987.Thetradedeficitshranktoa

lowof$31billionin1991,butithasgrownagaintomorethan$100billionayearsince
1994,(5)reaching$113.7billionin1997.(The$198.7billiondeficitingoodslastyear
wasoffsetbyan$85billionsurplusinservices.)(6)
Throughoutthe1980sand1990s,tradedeficitshavespawnedworryaboutunfair
foreigntradebarriers,lostjobs,andAmericasabilitytocompeteintheglobal
marketplace.Indeed,thetradedeficitwaspartlytoblameforawaveofangstinthe
late1980soverAmericandecline.BestsellingbookssuchasPaulKennedysThe
RiseandFalloftheGreatPowersandClydePrestowitzsTradingPlaces:HowWe
AllowedJapantoTaketheLeadcaughtthemoodofthetime.
Inthemid1980slawmakersonCapitolHillrespondedtothetradedeficitanxiety
withprotectionistleaningproposals.In1986theHouseapprovedbyatwotoone
marginanamendmentofferedbyRep.RichardGephardt(DMo.)thatwouldallow
theimpositionofimportquotasagainstcountriesthatwererunninglargebilateral
tradesurpluseswiththeUnitedStates.(Japan,Taiwan,andWestGermanywere
consideredthemostlikelytargetsatthetime.)TheamendmentpassedtheHouse
againin1987,byanarrowmargin,althoughitwasultimatelyexcludedfromthe1988
OmnibusTradeandCompetitivenessActinfavoroftheSuper301lawthreatening
retaliationagainstcountriesengagedinallegedlyunfairtradepractices.(7)
InNovember1991Gephardttriedagain,proposinganamendmentthatwouldactivate
Section301sanctionsagainstanynationwhosebilateraltradesurpluswiththeUnited
Statesaccountedformorethan15percentofthetotalU.S.tradedeficit.Likethe
originalGephardtamendmentof198688,thisproposalexploitedtwowidelyshared
beliefs:thatnationsoughtnormallytobalancetheirtradebilaterally,andthatdeficits
werecaused,inimportantpart,bythesurpluscountrysbarrierstoimports,observed
tradescholarI.M.Destler.(8)
ThetradedeficithascontinuedtohauntU.S.tradepolicyinthe1990s.Inthedebate
inthefallof1997overrenewaloffasttracktradeauthority,opponentsofthemeasure
citedthecontinuingoverallU.S.tradedeficitasevidencethattradeharmstheU.S.
economyanddestroysjobs.TodiscredittheNorthAmericanFreeTradeAgreement,

andbyassociationallfreetradeagreements,opponentsoffasttrackauthority
hammeredawayatthebilateraltradedeficitstheUnitedStatesrunswithbothofits
NAFTApartners,MexicoandCanada.
ThedeficitwithMexicodrewthemostfirebecauseAmericasbilateralbalancewith
Mexicohadbeeninsurplusbefore1995.InSeptember1997SteveBeckman,an
economistfortheUnitedAutoWorkerslaborunion,testifiedbeforetheSubcommittee
onTradeoftheHouseWaysandMeansCommitteethatbilateraltradedeficitswith
CanadaandMexicohadcreatedatradedebaclecostingtheU.S.economymorethan
400,000jobs.(9)
BilateraltradedeficitscontinuetocomplicateAmericascommercialrelationswitha
numberofmajortradingpartners,chiefamongthemJapanandChina.In1997the
UnitedStatesrecordeda$55.7billionbilateraltradedeficitwithJapananda$49.7
billiondeficitwithChina,byfarourtwolargestbilateralimbalances.(10)Thedeficit
withChinaappearsevenmorethreateningtosometradecriticsbecauseithasgrown
sorapidlyinrecentyears,morethanquadruplingfrom$11.5billionin1990.(11)Our
bilateraldeficitwithChinahasbeenusedtoargueagainstrenewalofChinasMost
FavoredNationstatusandagainstadmittingittotheWorldTradeOrganization.
AmericasbilateraltradedeficitwithJapanhasprobablybeenthesinglebiggestsource
oftradefrictionbetweenthetwocountries.(12)
IftheoverallU.S.tradedeficitrisesin1998aspredicted,itcouldspurawholenew
roundofattacksonfreetrade,promptinggovernmentinterventiontocurbimports
andspurexports.
UnderstandingtheU.S.TradeDeficit
Thetradedeficithasbeenattheheartofoneoftheoldestdebatesineconomics.The
mercantilistapproachtotradethatdominatedthinkinginthe17thand18thcenturies
stressedtheneedfornationstoaccumulategold.Byexportingmorethanthey
imported,nationscouldhoardtheexcessmoney,almostalwaysgoldorsilver,
generatedbythetradesurplus.Atreasurybulgingwithpreciousmetalswas
consideredthetruesignofanationswealthandmight.Themoremetallicmoneya
statepossessed,themoreableitwouldbetowagewarifnecessary.

Predictably,theobsessionwithrunningapositivebalanceoftradeledtoallsortsof
protectionistmeasuresandexportsubsidies.Hightariffsandoutrightimportbans
weretheruleamongEuropeannationsbefore1800.
BacktoSmithandHume
Inarguingforfreetrade,the18thcenturyclassicalliberalsDavidHumeandAdam
SmithattackedwhatHumecalledastrongJealousywithregardtothebalanceof
trade.(13)Humereasonedthatanationssupplyofgoldwasultimatelydeterminedby
itscapacitytoproducewealth,nottheotherwayaround.Anationthatattemptedto
accumulategoldthroughatradesurplus,byeitherblockingimportsorsubsidizing
exports,wouldsoonfindthatitsgoldstockswererisinginrelationtothetotalgoods
availableforsale.Thatexcessofmoneywouldcauseageneralriseinthepriceof
domesticgoods(i.e.,inflation),makingthemlessappealingtoforeignbuyers.Aslong
aspriceskeptrising,demandforexportswouldfalluntiltheinwardflowofgold
ceased.AsHumeunderstoodtwocenturiesago,anyattempttomanufactureatrade
surplusthroughtradepolicywasdoomedtofailbecausetheflowofmoneywouldbe
selfcorrecting.
HumescontemporaryandfriendAdamSmithalsodismissedworriesaboutthetrade
deficit.Nothingcanbemoreabsurdthanthiswholedoctrineofthebalanceoftrade,
hewrote.(14)WhatmatteredtoSmithwasnotthedifferencebetweenexportsand
importsbutthegainsfromspecializationthattradeallows.Thoseproductivitygains
allowanationsresidentstoproducegoodsandservicesofahighertotalvaluethe
onlytruemeasureofanationseconomicwealth.Anyinterferenceinthefreedomto
trade,nomatterwhatitseffectonthetradebalance,diminishesthatwealth.Atrade
whichisforcedbymeansofbounties[subsidies]and[protected]monopoliesmaybe,
andcommonlyis,disadvantageoustothecountryinwhosefavoritismeanttobe
established.Butthattradewhich,withoutforceorconstraint,isnaturallyand
regularlycarriedonbetweenanytwoplaces,isalwaysadvantageous,thoughnot
alwaysequallyso,toboth.(15)SmithandHumescritiqueofthebalanceoftrade
doctrineremainsvalidtwocenturieslater.
InvestmentFlowsDrivetheDeficit

ThemostimportanteconomictruthtograspabouttheU.S.tradedeficitisthatithas
virtuallynothingtodowithtradepolicy.Anationstradedeficitisdeterminedbythe
flowofinvestmentfundsintooroutofthecountry.Andthoseflowsaredeterminedby
howmuchthepeopleofanationsaveandinvesttwovariablesthatareonly
marginallyaffectedbytradepolicy.
Anunderstandingofthetradedeficitbeginswiththebalanceofpayments,the
broadestaccountingofanationsinternationaltransactions.Bydefinition,thebalance
ofpaymentsalwaysequalszerothatis,whatacountrybuysorgivesawayinthe
globalmarketmustequalwhatitsellsorreceivesbecauseoftheexchangenatureof
trade.(16)People,whethertradingacrossastreetoracrossanocean,willgenerallynot
giveupsomethingwithoutreceivingsomethingofcomparablevalueinreturn.The
doubleentrynatureofinternationalbookkeepingmeansthat,foranationasawhole,
thevalueofwhatitgivestotherestoftheworldwillbematchedbythevalueofwhatit
receives.
Thebalanceofpaymentsaccountscapturetwosidesofanequation:thecurrent
accountandthecapitalaccount.Thecurrentaccountsideoftheledgercoverstheflow
ofgoods,services,investmentincome,anduncompensatedtransferssuchasforeign
aidandremittancesacrossbordersbyprivatecitizens.Withinthecurrentaccount,the
tradebalanceincludesgoodsandservicesonly,andthemerchandisetradebalance
reflectsgoodsonly.Ontheotherside,thecapitalaccountincludesthebuyingand
sellingofinvestmentassetssuchasrealestate,stocks,bonds,andgovernment
securities.
Ifacountryrunsacapitalaccountsurplusof$100billion,itwillrunacurrentaccount
deficitof$100billiontobalanceitspayments.AseconomistDouglasIrwinexplains,
Ifacountryisbuyingmoregoodsandservicesfromtherestoftheworldthanitis
selling,thecountrymustalsobesellingmoreassetstotherestoftheworldthanitis
buying.(17)
Thenecessarybalancebetweenthecurrentaccountandthecapitalaccountimpliesa
directconnectionbetweenthetradebalanceontheonehandandthesavingsand
investmentbalanceontheother.Thatrelationshipiscapturedinthesimpleformula:

SavingsInvestment=ExportsImports
Thus,anationthatsavesmorethanitinvests,suchasJapan,willexportitsexcess
savingsintheformofnetforeigninvestment.Inotherwords,itmustrunacapital
accountdeficit.Themoneysentabroadasinvestmentwillreturntothecountryto
purchaseexportsinexcessofwhatthecountryimports,creatingacorresponding
tradesurplus.AnationthatinvestsmorethanitsavestheUnitedStates,forexample
mustimportcapitalfromabroad.Inotherwords,itmustrunacapitalaccount
surplus.Theimportedcapitalallowsthenationscitizenstoconsumemoregoodsand
servicesthantheyproduce,importingthedifferencethroughatradedeficit.
In1996Americansinvested$1,117billionprivatelyandanother$224billionthrough
government,foratotalof$1,341billioningrossdomesticinvestment.National
savings,however,fellshortofthatamount,requiringAmericanstoimportanet$133
billionincapital.(18)ThatsameyearAmericanspaid$1,238billiontotherestofthe
worldforimportsofgoodsandservices,nettransferpayments,andincomeonforeign
investmentsintheUnitedStates,whilereceiving$1,105billionforexportsand
investmentincome.Theresultwasacurrentaccountdeficitof$133billion,equalto
thenetinflowofforeigncapital.(19)
Thetransmissionbeltthatlinksthecapitalandcurrentaccountsistheexchangerate.
Asmorenetinvestmentflowsintoacountry,demandrisesforthedollarsneededto
buyU.S.assets.Asthedollargrowsstrongerrelativetoothercurrencies,U.S.goods
andservicesbecomemoreexpensivetoforeignconsumers,reducingdemand,while
importsbecomemoreaffordabletoAmericans.Fallingexportsandrisingimports
adjustthetradebalanceuntilitmatchesthenetinflowofcapital.Ineffect,foreign
investorswilloutbidforeignconsumersforlimitedU.S.dollarsuntiltheinvestors
satisfytheirdemandforU.S.assets.Ofcourse,mostdaytodaycurrencytransactions
arenotdirectlyrelatedtotrade,butdemandforU.S.goods,services,andassetsaffects
demandforthedollarsneededtobuythem,thusinfluencingthevalueofthedollarin
globalcurrencymarkets.

Germanyintheearly1990soffersacasestudyofhowthismechanismworks.West
Germansroutinelyranlargecurrentaccount(andtrade)surplusesinthe1980s,but
between1990and1991Germanyscurrentaccountflippedfromasurplusof3.2
percentofgrossdomesticproducttoadeficitof1.0percent.(20)Thereasonforthe
reversalwasnotthatGermanmanufacturerssuddenlylosttheirlegendaryefficiency,
orthatGermanystradingpartnersimposednewandunfairtradebarriersonthenight
ofDecember31,1990.Whatcausedtheswitchwasthehugeincreaseindomestic
investmentneededtorebuildformerlycommunisteasternGermany.Anincreasein
domesticinvestmentrepatriatedahugeamountofGermansavingsthathadbeen
flowingabroad,thusreducingtheamountofGermanmarksintheforeigncurrency
marketsandraisingtheirvaluerelativetoothercurrencies.Thestrongermark,in
turn,raisedthepriceofGermanexportsandloweredthepriceofimports,evaporating
Germanystradesurplus.
InanOctober1997studyfortheEconomicStrategyInstitute,economistPeterMorici
attemptstoofferanalternativeexplanationforthetradedeficit.Apressrelease
accompanyingthestudydismissestheoldchestnutthatthecurrentaccountissimply
theothersideofanimmutableaccountingidentity.(21)Asevidence,Moricicitesthe
effectonthetradedeficitcausedbythepurchaseofU.S.assets,inparticularTreasury
bills,byforeigngovernments.
Moricisanalysisisnotarefutationoftheaccountingidentitybutarestatementofit.
WhetherthetransactioninvolvesaprivateforeigninvestorsbuyingsharesinIBMora
foreigngovernmentsbuyingTbills,itstillcountsasaninflowofforeigncapitaltothe
UnitedStates.Indeed,MoricisownregressionanalysisfindsthatchangesintheU.S.
tradebalancesarestronglycorrelatedwithprivateinvestmentflows.Overall
variationsinprivatesectorbehaviorappeartobemoreimportantthandirect
measuresofeitherU.S.orforeigngovernmentpolicies,heconcluded.Amongprivate
variablesnetforeignprivateinvestment(NFPI)seemstoexplainmoreofthevariation
inthetradeandcurrentaccountsbalancesthanthedomesticprivatesavings
balance.(22)Inotherwords,theoldchestnutstillringstrue:investmentflowsdrive
thetradedeficit.
WhyProtectionismCannotCuretheTradeDeficit

Thecausallinkbetweeninvestmentflows,exchangerates,andthebalanceoftrade
explainswhyprotectionismcannotcureatradedeficit.Inhis1997book,OneWorld,
ReadyorNot,WashingtonjournalistWilliamGreiderproposesanemergencytariff
of10or15percenttoreducetheU.S.tradedeficit.(23)IfCongressweretoimplement
thatawfulidea,Americanimportswouldprobablydeclineasintended.Butfewer
importswouldmeanfewerdollarsflowingintotheinternationalcurrencymarkets,
raisingthevalueofthedollarrelativetoothercurrencies.Thestrongerdollarwould
makeU.S.exportsmoreexpensiveforforeignconsumersandimportsmoreattractive
toAmericans.Exportswouldfallandimportswouldriseuntilthetradebalance
matchedthesavingsandinvestmentbalance.
Withoutachangeinaggregatelevelsofsavingsandinvestment,thetradedeficitwould
remainlargelyunaffected.Allthenewtariffbarrierswouldaccomplishwouldbeto
reducethevolumeofbothimportsandexports,leavingAmericanspoorerbydepriving
themofadditionalgainsfromthespecializationthataccompaniesexpanding
internationaltrade.
Governmentexportsubsidieswouldbeequallyineffectiveinreducingthetradedeficit.
PartlyinresponsetotheAsianfinancialcrisis,PresidentClintonproposedinhis1999
federalbudgetanincreaseinsubsidiestoU.S.exportersthroughtheExportImport
Bank.Byallowingcertainexporterstolowertheirpricesonsalesabroad,thesubsidies
wouldstimulateforeigndemand,butthegreaterdemandfordollarsneededtobuy
U.S.goodswouldbidupthedollarsvalueinforeignexchangemarkets.Thestronger
dollar,inturn,wouldraisetheeffectivepriceofU.S.exportsgenerally,offsettingany
priceadvantagegainedbythesubsidies.Totalexports,andhencethetradedeficit,
wouldremainunchanged.Subsidiesonlydivertexportsfromlessfavoredtomore
favoredsectors.
Intheory,tradepolicycanindirectlyaffectthetradedeficitbyinfluencinganations
levelofsavingsandinvestment.Forexample,ahighertariffwouldpresumablyraise
governmentrevenuethroughadditionalcustomsduties,thusreducingthebudget
deficit(orincreasingthesurplus)andreducingtheneedtoborrowfromabroad
resultinginasmallertradedeficit.Butatariffcanalsostimulateinvestmentinthe
protectedindustry,increasingdemandforforeigncapitalandleadingtoalargertrade

deficit.Aftersurveyingthevarioustheories,LaborDepartmenteconomistRobertC.
Shelburneconcluded,Tradepolicyislikelytohaveamarginalimpactonsavingsor
investmentandthusonlyamarginalimpactonthetradebalance.(24)EvenMorici
concurs,notingthatchangesintradepolicieshavehadminimaleffectsonaggregate
netexportsinrecentyears.(25)
Anothertemptationistointervenebyintentionallydevaluingthenationalcurrencyin
theforeignexchangemarket.Anationscentralbankcanputdownwardpressureon
thevalueofitsowncurrencybycreatinganexcessamountofthatcurrencyandusing
theexcesstopurchaseforeigncurrencies.Afallingcurrencycanstimulateexportsand
dampendemandforimports,thusreducingatradedeficit.However,acheaper
currencyalsomeansthatassetvaluesinthatcountrydropinforeigncurrencyterms,
attractingforeigninvestmentflowsthatincreasethecapitalaccount(andthe
correspondingcurrentaccountdeficit).Andeventuallytheweakercurrencyfeedsback
intothedomesticeconomyintheformofhigheroverallprices,thatis,inflation.Inthe
longrun,higherdomesticpriceswilloffsetanypriceadvantagegainedinthe
internationalmarketplacebyacompetitivedevaluation.
ProvenTradeDeficitCutter:ARecession
OnewaytoreducethetradedeficitwouldbeforAmericanstosavemore.Alargerpool
ofnationalsavingswouldreducedemandforforeigncapitalwithlessforeigncapital
flowingintothecountry,thegapbetweenwhatwebuyfromabroadandwhatwesell
wouldshrink.(26)
Arelatedwaytocutthetradedeficitisforthegovernmenttoborrowless.Reducing
thegovernmentdeficit(aformofdissaving)releasesmorefundsfordomestic
investment,reducingthedemandforforeigncapital.Thatexplainsthetwindeficits
phenomenonofthe1980s,whenhugefederalbudgetdeficitsclaimedarisingshareof
nationalsavings,requiringtheimportationofsavingsfromabroadtomeetdomestic
demandforinvestment.Theinflowofforeigncapitalpromptedbythebudgetdeficit
allowedAmericanstobuyevenmoregoodsandservicesthantheysoldinthe
internationalmarketplace.Asthefederalbudgetdeficitdeclinedinthelate1980s,so
toodidAmericastradedeficit.

Figure1
TheTradeBalanceandU.S.Recessions

Another,lessappealingwaytoreducethetradedeficitistoreduceinvestment.That
occursmoreorlessnaturallyduringtimesofrecession,whenbusinessconfidencefalls
andcompaniescutbackonexpansionplans.AsAmericansconsumeandinvestless,
demandforimportsandforeigncapitalfallsalongwiththetradedeficit.Thatexplains
whythesmallestU.S.tradedeficitsincetheearly1980soccurredin1991,inthemidst
ofthemostrecentrecession.(27)Infact,asFigure1illustrates,theU.S.current
accountbalancetendstoshrinkduringtimesofrecessionandgrowduringeconomic
expansions.Ifthetradedeficitreallyisoneofournationsmostpressingproblems,
thesurestandswiftestwaytotackleitwouldbetoengineeradeeprecession.
ThatisexactlywhathappenedtoMexicoin1995.Intheaftershockofthepesocrisis,
MexicosrealGDPshrankin1995by6.2percent.Becauseoffallingdomesticdemand,
fleeingcapital,andaplungingpeso,Mexicosoveralltradebalanceflippedfroma
deficitin1994toasurplusin1995.MexicosbilateralbalancewiththeUnitedStates
didthesame,goingfromadeficittoasurplus.Thatsupposedtradedebacleforthe
UnitedStateshadnothingtodowithNAFTAoranyotherchangeintradepolicy.It
wascausedbymismanagementonthepartofMexicosmonetaryauthorities,andthe
chiefvictimsofthatmismanagementwereMexicanworkers.PerhapsNAFTAcritics

whobelieveourbilateraltradedeficitwithMexicoissuchaterribledevelopment
wouldhavepreferredthattheU.S.economy,nottheMexicaneconomy,contract6.2
percentinoneyear.Ofcourse,Americanworkerswouldhavesuffered,butitwould
havedonewondersforourbilateraltradebalance.
Anunderstandingoftheallimportantroleofinvestmentflowsshouldliberatetrade
policyfromitsobsessivefocusonthecurrentaccountbalance.Thetradedeficitisnot
afunctionoftradepolicy,andthereforetradepolicycannotbeatoolforreducingthe
tradedeficit.
EnduringMythsabouttheTradeDeficit
MisunderstandingoftheU.S.tradedeficithasspawnedanumberofmythsabout
internationaltradeandAmericasplaceintheglobaleconomy.Thosemythshave
allowedtradedeficitstobeusedtofurtheranumberofantitradeandantimarket
positions,includingexportsubsidies,industrialpolicy,andsanctionsagainstunfair
tradingpartners.Thefollowingareamongthemostcommonandharmfulmyths
surroundingthetradedeficit.
Myth:U.S.ExportersFaceUnfairTradeBarriers
ManyAmericansareconvincedthatabilateraltradedeficitprovesthattheforeign
countrysmarketisrelativelyclosedtoU.S.exportscomparedwiththeopenU.S.
market.AmericaslargebilateraldeficitwithJapanisalmostunanimouslyseenasa
problembyU.S.policymakerswhosharethatview,withblameforthedeficitsplaced
squarelyonunfairforeigntradebarriers.
AsurveyofAmericasmajortradingpartnerschallengesthatassumption.Countries
withwhichtheUnitedStatesrunslargedeficitsarenotcharacteristicallymore
protectionisttowardU.S.exportsthanarethosewithwhichwerunasurplus.Canada
andMexico,twocountriesthatareveryopentoU.S.exportsthanksinparttoNAFTA,
arebothamongthefivecountrieswithwhichtheUnitedStateshasthelargest
bilateraltradedeficits.Ontheotherside,Americasthirdlargestbilateraltrade
surplusiswithBrazil,acountrywhosebarrierstoimportsremainrelativelyhigh.
AmericansfaceacommonexternaltariffwhenexportingtomembersoftheEuropean

Union,yetsomeEUmembers(theNetherlandsandBelgium)areamongthetop
surplustradepartners,andothers(GermanyandItaly)areamongthetopdeficit
partners.Tradepolicycannotexplainthosedifferences(Table1).
Table1
AmericasTop10BilateralDeficitsandSurpluses1997
(billionsofU.S.$)
U.S.Deficit

U.S.Surplus

Japan

$55.9

Netherlands

+$12.5

China

$49.8

Australia

+$7.4

Germany

$18.7

Brazil

+$6.3

Canada

$17.9

Belgium

+$5.5

Mexico

$14.4

HongKong

+$4.8

Taiwan

$12.2

UnitedKingdom

+$3.8

Italy

$10.4

Argentina

+$3.6

Malaysia

$7.2

Egypt

+$3.2

Venezuela

$6.8

Chile

+$2.1

Nigeria

$5.5

SouthKorea

+$1.9

Source:U.S.DepartmentofCommerce,BureauoftheCensus,ForeignTradeDivision,
atwww.census.gov/foreigntrade.
Blamingbilateraldeficitsexclusivelyondifferencesintradepolicyonceagainmisses
therealityofinvestmentflows.InJapan,highdomesticsavingsratesprovideapoolof
capitalthatfarexceedsdomesticinvestmentopportunities.Japanexportscapitalto
theUnitedStates,whichallowsAmericanstoimportmoregoodsfromJapanthanwe
export.ThemainreasonthatAmericasbilateraltradedeficitwithJapanexplodedin
the1980sisthattheJapanesegovernmentliftedmanyofitscapitalcontrolswiththe
passageoftheForeignExchangeandForeignTradeControlLawinDecember1980.
ThatallowedatsunamiofJapanesesavingstoflowacrossthePacifictotheUnited
States,whereitcoulddrawamorefavorablerateofreturn.
Despitethecommonperception,JapanwasactuallymoreopentoU.S.exportsinthe
1980sthaninthe1960sand1970s,whenAmericanbilateraltradedeficitswithJapan
weremuchsmaller.AsRobertT.Parry,presidentandchiefexecutiveofficerofthe
FederalReserveBankofSanFrancisco,explained:

OfalltheU.S.tradingpartners,Japancontinuestobesingledoutforhavingthemost
unfairtradingpractices.Butitsdoubtfulthatsuchpolicieshavebeenamajorcauseof
U.S.tradedeficits.Firstofall,theJapanesemarkethasbecomesomewhatmoreopen
notmoreclosedoverthepastdecade.Second,Japansshareofchangesinthetotal
U.S.nonoilmerchandisetradedeficithasbeenproportionaltoitsU.S.tradeshare.
Forexample,in1981,about9percentofourexportswenttoJapan,andabout20
percentofourimportscamefromJapan.Thatleftuswithabilateraldeficitof$16
billion.Ifthesamesharesprevailedin1992,wewouldhavehadabilateraldeficitof
$57billionwhichisinfactalittlelargerthantheactualdeficitof$51billion.SoI
thinktheresnotmuchevidencetosaythatrestrictivetradepracticeshavebeenthe
drivingforcebehindchangesintheU.S.tradedeficit.(28)
ThesamecannotbesaidforourbilateraldeficitwithChina.Despitesubstantial
progressinthelast10years,itsbarrierstoimportsremainrelativelyhigh.Those
barrierspartlyexplainthebilateralsurplusChinarunswiththeUnitedStates,butthe
primaryexplanationismorebenign:WeliketoconsumetheproductsChinasells.In
1995theCouncilofEconomicAdvisersconcluded,Chinaspersistentsurpluswiththe
UnitedStatesinpartreflectsitsspecializationininexpensivemassmarketconsumer
goods.ChinasimilarlyrunsbilateralsurpluseswithJapanandEuropeforthis
reason.(29)
IfChinaweretofurtheropenitsmarket,AmericasbilateraldeficitwithChinawould
probablyshrink,butouroveralltradedeficitdeterminedbyaggregatesavingsand
investmentwouldremainlargelyunaffected.Arisingdollarcausedbyincreased
demandforU.S.exportstoChinawouldleadtolargerbilateraldeficits(orsmaller
surpluses)withotherU.S.tradingpartners.IftheUnitedStatesweretoimposehigher
tariffsaimedatimportsfromChina(say,byrevokingitsMostFavoredNationstatus),
thattoomightreducethebilateraldeficit,butnottheoverallU.S.tradedeficit.Higher
tariffsagainstChineseimportswouldmerelyshiftsomeofthebilateraltradedeficitto
othercountrieswhileraisingpricesforAmericanconsumers.
Myth:AmericaIsLosingItsCompetitiveness

In1992theCuomoCommissiononCompetitivenesslabeledthetradedeficitoneof
Americas10mosturgenteconomicproblems.BecauseofAmericanindustrys
decliningcompetitivenessandouropennesstotheglobaleconomy,theeconomic
demandspurredbythefederalbudgetdeficitsintheearly1980sprecipitatedahuge
flowofimports,thecommissionconcludedinitsreport,whichsimplyassumeda
connectionbetweentradedeficits,openness,andcompetitiveness.(30)
Thecompetitivenessmythhasgoneintoremissioninrecentyears.SincetheCuomo
Commissionreport,theUnitedStateshasenjoyedsevenconsecutiveyearsofhealthy,
noninflationarygrowthalongwithhistoricallylargeandrisingtradedeficits.
Meanwhile,JapanandGermany,thetwoexportdrivenjuggernautsthatwere
supposedtoeclipsetheUnitedStatesaseconomicpowersinthe1990s,havestruggled
withslowgrowthandrisingunemployment.
Americasexperienceinboththe1980sandthe1990srefutesanyconnectionbetween
tradedeficitsandalossofindustrialmight.Figure2showsthatindustrialproduction
intheUnitedStateshasclimbedsteadilyinthepasttwodecadesduringatimeof
historicallylargeU.S.tradedeficits.
Figure2
TheTradeBalanceandIndustrialProduction

Between1980and1987,whentheU.S.currentaccountdeficitwasrisingtoapeakof
3.6percentofGDP,U.S.industrialproductionroseby17percentandtotal
manufacturingoutputby23percent.(31)Thesamestoryhasrepeateditselfinthe
1990s.Between1992and1997theannualU.S.tradedeficitalmosttripled,from$39
billionto$114billion.(32)Meanwhile,since1992totalindustrialproductioninthe

UnitedStateshassurgedby24percentandmanufacturingproductionby27percent.
(33)InJapanduringthesameperiod,industrialproductionhasgrownbyonly8
percent,andinGermanygrowthhasbeenlessthan1percent.(34)Americaruns
substantialbilateraltradedeficitswithbothcountries.
Americaistheworldsnumberonetradingnationinbothimportsandexports.
Between1992and1997,U.S.exportsofgoodsandservicessurgedfrom$617billionto
$932billion.Thereasonthetradedeficithasgrownisthatimportshaveincreased
evenfaster,from$657billionto$1,046billion.(35)Byanydefinition,theabilityof
Americanindustrytocompeteintheworldhasnotsufferedbecauseofarisingtrade
deficit.Theexperienceofthe1980sand1990spointsinquitetheoppositedirection.
Myth:TradeDeficitsMeanLostJobs
AstudybytheInstituteforPolicyStudiesinJanuary1998predictsthatthelarger
tradedeficitcausedbytheEastAsianfinancialmeltdownwillcosttheU.S.economy
morethan1millionjobs.ColumnistPatrickBuchanan,whenrunningunsuccessfully
fortheRepublicanpresidentialnominationin1996,offeredhisown,backofthe
envelopeestimateofjobslostbecauseofthetradegap:Ourmerchandisetradedeficit
was$175billion(in1995).Forevery$1billion,youget20,000jobs.Thats3.5million
Americanworkerswhowouldhavehadgoodmanufacturingjobsifwesimplyhada
tradebalance.(36)Bothestimatesarebasedonafundamentalmisunderstandingof
therelationshipbetweentradeandaggregateemploymentintheUnitedStates.
ThetotalnumberofjobsintheUnitedStatesislargelydeterminedbyfundamental
macroeconomicfactorssuchaslaborsupplygrowthandmonetarypolicy.Tradewith
othernationsdoesnotreducethenumberofjobs,butitdoesquickenthepaceat
whichproductionshiftsfromonesectortoanother.Trade,likenewtechnology,lowers
demandforsomejobswhileraisingdemandforothers.TradeallowstheUnitedStates
toproducemoreBoeingjetliners,pharmaceuticals,software,andfinancialservicesfor
export,buttradealsomeansweproducefewershoes,Tshirts,HappyMealtoys,and
computermemorychips.Meanwhile,totaloutputandtotalemploymentkeep
growing.

Inreality,largertradedeficitscorrelatepositivelywithfallingunemployment.Figure
3illustrateshowcloselytheunemploymentratecorrespondswithchangesintheU.S.
tradedeficit.Whenthetradedeficitexpands,asitdidinthe1980s,unemployment
falls.Whenthedeficitshrinks,asitdidduringthe199091recession,the
unemploymentraterises.Asthetradedeficithasexpandedinthe1990s,the
unemploymentratehasfallensteadily.Theunemploymentratefellinallbut2ofthe
mostrecent14yearsinwhichthetradedeficitgrewlargerthanithadbeenthe
previousyear(197678,198287,199294,199697).(37)Asanexpandingeconomy
createsjobs,italsocreatesdemandforimportsandforcapitalfromabroad.
Figure3
TheTradeBalanceandUnemployment

Thereisnoreasontobelievethateliminatingthetradedeficitwouldcreateanygainin
manufacturingjobs,nevermind3.5million.WiththeU.S.economyalreadyoperating
atalowlevelofunemployment,itisnotclearwhere3.5millionnewmanufacturing
workerswouldcomefrom.Andaswehavealreadyseen,aprotectivetarifftoclosethe
tradedeficitwouldonlysucceedinreducingexportsaswellasimports,thus

eliminatingmanufacturingjobsintheexportsector.IfBuchananscalculationshad
anymeaning,weshouldexpecttoseeafallinmanufacturingemploymentduring
periodsofrisingtradedeficits.Recenteconomictrendstelladifferentstory.Since
1993theU.S.merchandisetradedeficithasgrownfrom$132billionto$198billion.
(38)InthatsameperiodthenumberofAmericansemployedinmanufacturinghas
grownfrom18,075,000to18,678,000anincreaseofmorethan600,000.(39)
Ifanything,risingtradedeficitssignalmorejobs,notfewer.
Myth:TheTradeDeficitIsaDragonEconomicGrowth
TheAsianfinancialcrisisisexpectedtoshaveafewtenthsofapercentagepointoffthe
rateofgrowthofU.S.GDPin1998,buttoblameslowerU.S.growthonanexpanded
tradedeficitistoconfusecauseandeffect.
TherealdragonU.S.economicgrowthisfallingdemandinEastAsiaforU.S.exports.
Atthesametime,fallingcurrencyvaluesinEastAsiamaketheregionsexportstothe
UnitedStatesmoreattractive,leadingtoalargerU.S.tradedeficit.Agrowingtrade
deficitisnotthecauseofslowerU.S.growthinstead,slowergrowthandabigger
tradedeficitarebotheffectsofEastAsiaseconomicslowdown.
Inhisstudy,Moriciclaimsthatpersistenttradedeficitsreducelongtermeconomic
growthbyshiftinglaborandcapitalfromhighR&DtolowR&Dactivities.(40)That
claimisbasedpartlyonthefactthatresearchanddevelopmentexpenditures,and
wages,tendtobehigherintraderelated(thatis,exportingandimportcompeting)
sectorsthaninnontraderelatedsectorsoftheeconomy.Theproperlessontobe
drawnisnotthattradedeficitsarebadforeconomicgrowthbutthattradeisgoodfor
growth.Inotherwords,thetruemeasureoftheeffectoftradeontheeconomyisnot
exportsminusimportsbutexportsplusimports.
Farfrombeingadrag,atradedeficitcanbeagoodsignforaneconomywhenit
reflectsgrowingdemandforimports.Whenaneconomyexpands,consumersareable
toaffordmoregoods,bothdomesticandimported.Returnsoninvestmentalso

increase,attractingforeigncapital.Thecombinationofinflowingcapitalandincreased
demandforimportstendstowidenthetradedeficit.Thatexplainswhyeveryrecent
U.S.economicexpansionhasbeenaccompaniedbyanexpandingtradedeficit.
Since1980,inthesixyearsinwhichthecurrentaccountdeficithasshrunkfromthe
previousyearasapercentageofGDP,theaveragegrowthrateoftheU.S.economyhas
been2.0percent.Inthe11yearsinwhichthecurrentaccounthasgrownlargerasa
percentofGDP(i.e.worsened),theaveragegrowthrateofGDPhasbeen3.1percent.
(41)Thosewhomaintainthatthetradedeficitisadragongrowthneedtoexplainwhy
oureconomygrows50percentfasterinyearsinwhichthedeficitexpands.
Withoutatradedeficit,Americanswouldneedtofinancedomesticinvestment
exclusivelyfromdomesticsavings.Tobringinvestmentinlinewithsavings,domestic
interestrateswouldneedtorise,reducinginvestmentandeconomicgrowth.Asthe
CouncilofEconomicAdvisersrecentlyconcluded,thetradedeficithasbeenasafety
valvefortheexpandingU.S.economy.Importsofgoodshavekeptinflationlow,
whileimportsofcapitalhavekeptinterestrateslow,helpingtosustainrapidincome
growth.InthestronglyexpandingfullemploymenteconomythattheUnitedStates
nowenjoys,itshouldbeeasierforAmericanstoseethattradedeficitsdonot
necessarilyreduceoutputandemployment.(42)
TheUnitedStatesrantradedeficitsthroughoutmuchofthe19thcenturyduringa
periodofdynamicgrowthandexpansion.Fromindependenceuntilthe1880s,
Americawasanetimporterofcapitalfromtherestoftheworld,inparticularGreat
Britain.Foreigninvestorsprovidedthecapitaltobuildtherailroadsandcanals
Americaneededforacontinentwideeconomy.Inthe19thcentury,especiallyafterthe
cottonboomofthe1830s,itwasthecurrentaccountthatwentintotheredinorderto
balancetheheavyinflowoffundstofinanceAmericanenterprise.TheUnitedStates
hadmoreprofitableinvestmentopportunitiesthanithaddomesticsavingstofinance
them.TheBritish,Germans,Dutch,andFrenchsteppedinandmadethemselves(and
ourAmericanforebears)richer.(43)

TodayAmericansruntradedeficitswiththerestoftheworldformuchthesame
reason:Americasrelativelyfreeandunregulatedeconomyoffersattractiveinvestment
opportunities.Attemptstoreducethetradedeficitthroughgovernmentintervention
wouldreduceoureconomicefficiency,slowinginvestmentandgrowth.
ExportsAreGood,ImportsAreBetter
Underlyingeachofthosemyths,andmuchofthemisunderstandingabouttrade
deficits,istheassumptionthatexportsaregoodandimportsarebad.Toanyonewho
acceptsthatpremise,atradedeficitwillbydefinitionbeaproblem.
PatBuchanan,duringa1996campaignstopinMaryland,statedthecasewith
characteristicbluntness:ThisharborinBaltimoreisoneofthebiggestandbusiestin
thenation.ThereneedstobemoreAmericangoodsgoingout.Wevegottostart
exportingmoregoodsandstopexportingourfactoriesandexportingourjobs.(44)
EvenmanyadvocatesoffreetradeimplicitlyagreewithBuchanan.Inhisstateofthe
unionaddressinJanuary,PresidentClintonurgedCongresstopassfasttracktrade
legislationtoopenmorenewmarketsforU.S.exportsandtocreatemorenewjobs.
Imports,incontrast,werepaintedasathreat.Thepresidentwarnedthat,withoutU.S.
aidthroughtheInternationalMonetaryFund,fallingcurrenciesintheFarEastwould
meanthepriceoftheirgoodswilldrop,floodingourmarketandotherswithmuch
cheapergoods,whichmakesitalottougherforourpeopletocompete.(45)
Byfocusingexclusivelyonthedangerofcheapergoodsandnotthebenefits,the
presidentchosetochampionthecauseofasmallgroupofproducerswhileignoring
thewelfareofthelargemajorityofconsumerswhowillbenefitfrommoreaffordable
imports.
ImportsblessAmericansinanumberofsubstantialways.First,importsmeanlower
pricesandwiderchoiceforAmericanconsumers.Byexertingdownwardpressureon
prices,importsraisetherealwagesofAmericanworkers.Importscreateprice
competitionwhereadomesticmonopolyoroligopolymightotherwiseexist.Theyalso
spurdomesticproducerstocontrolcostsandraisequalityinresponsetoforeign
competition.

Second,importsofintermediaryinputsbenefitAmericanproducersbykeepingfinal
pricesdown.OnereasontheU.S.computerindustryissosuccessfulandcompetitiveis
thatitisabletoimportcomponentparts,suchasdiskdrivesandDRAMchips,at
worldmarketprices.ThelargestcategoriesofgoodsimportedtotheUnitedStatesare
notconsumergoodsbutcapitalgoodsandindustrialsuppliesandmaterials.Together
theycomprisedmorethanhalfofthe$803billioningoodsAmericansimportedin
1996.(46)Restrictingimportshurtsunprotectedproducersaswellasconsumers.
Third,importsofcapitalgoodsmakeAmericansmoreproductive.Higherproductivity
meansahigherstandardofliving.Withoutimports,Americanswouldbedeprivedof
thetechnologyandknowhowembodiedinnew,importedmachinery.
Exportsarenotthereasonwetradetheyarethemeansbywhichweacquireimports.
Itisimports,notexports,thatallowAmericanstoenjoyahigherstandardofliving.
Exportswithoutimportsarelikeajobwithoutapaycheck.
Conclusion
Misunderstandingofthetradedeficitthreatenstounderminethefreedomtotradeby
encouragingfaultyanddamagingsolutionstoaproblemthatdoesnotexist.Any
attempttofixthetradedeficitthroughprotectionism,exportsubsidies,orcurrency
manipulationisboundtofailbecausenoneofthosetoolsofinterventionaddressesthe
underlyingcausesofthetradedeficit.Thetradedeficitwillrespondonlytochangesin
anationsnetflowofforeigninvestment,whichinturnisdeterminedbyitsunderlying
ratesofsavingsandinvestment.
Americas$114billiontradedeficitin1997,andtheprospectofalargerdeficitin1998,
arenotacauseforworry.OurtradedeficitreflectsthefactthatAmericaremainsan
attractivehavenforinternationalinvestors.ThetradedeficitallowsAmericansto
maintainalevelofinvestmentinourfutureproductivitythatwouldbeimpossibleif
wewererequiredtorelysolelyonourcurrentlevelofdomesticsavings.
Noneofthecommonconcernsaboutthetradedeficitholdsuptoempiricalscrutiny.
Tradedeficitscannotbeblamedforunemploymentorslowergrowth,noraretheya
signofunfairtradepracticesabroadordecliningindustrialcompetitivenessathome.

Tradedeficitsmayevensignifygrowingconsumerdemandandexpandinginvestment
opportunities.
Whatmatterstoanationseconomichealthisnotthedifferencebetweenexportsand
importsbutthedegreetowhichitscitizensarefreetotradeandinvestacross
internationalborders.Whencitizensareallowedtobuyandsellgoods,services,and
investmentassetsfreelyintheinternationalmarketplace,anationsproductive
resourceswilltendtoflowtothebestandhighestuse,raisingthenationsoverall
standardofliving.
Inthefinalanalysis,nationsdonottradewitheachotherpeopledo.Every
internationaltransactionthatAmericansengageinwill,bydefinition,leaveboth
partiestothetransactionbelievingtheyarebetteroffthanbeforeotherwisethe
transactionwouldnotoccur.Bythismeasure,thebalanceoftradeisalwayspositive,
benefitingthenationasawhole.

Notes
1.GordonPlatt,1998TradeDeficitPredictedtoReach$250BillionTheHighest
Ever,JournalofCommerce,December4,1997andJohnMaggs,1997TradeDeficit
Hits9YearHigh,JournalofCommerce,February20,1998.
2.QuotedinReportersAssumeTradeGapIsBadNews,MediaNomics,(Media
ResearchCenter,Alexandria,Va.)February1998,p.3.
3.TranscriptprovidedbytheMediaResearchCenter,Alexandria,Va.
4.ChristinaDuff,U.S.TradeGapGrew24%inDecember:DeficitCouldWorsenin
'98AsAsia'sIllsSpillOver,SomeAnalystsWarn,WallStreetJournal,February20,
1998,p.A2.
5.CouncilofEconomicAdvisers,EconomicReportofthePresident1998
(Washington:GovernmentPrintingOffice,1998),TableB103,p.398.
6.RichardW.Stevenson,TradeDeficitFor1997Hit9YearHigh,NewYorkTimes,
February20,1998,p.C1.

7.I.M.Destler,AmericanTradePolitics(Washington:InstituteforInternational
Economics,1995),pp.9195.
8.Ibid.,p.269.
9.SteveBeckman,InternationalUnion,UnitedAutomobile,Aerospaceand
AgricultureImplementWorkersofAmerica,StatementbeforetheSubcommitteeon
TradeoftheHouseCommitteeonWaysandMeans,September11,1997.
10.Duff.
11.InternationalMonetaryFund,DirectionofTradeStatisticsYearbook
(Washington:IMF,1997),p.453.
12.OnMarch23,1998,theU.S.Senatevotedtospend$2milliontofundan
EmergencyTradeDeficitReviewCommission.Thecommissionwouldstudythe
causesoftheU.S.merchandiseandcurrentaccountdeficitsandrecommendpolicy
changes,withspecialfocusonthebilateraldeficitswithChinaandJapan.SeeSenate
ApprovesProvisionCreatingCommissiononTradeDeficit,InsideU.S.Trade,March
27,1998,p.13.
13.DavidHume,OftheBalanceofTrade,Essays:Moral,PoliticalandLiterary
(1777Indianapolis:LibertyFund,1987),p.309.
14.AdamSmith,AnInquiryintotheNatureandCausesoftheWealthofNations
(1776NewYork:RandomHouse,1937),p.456.
15.Ibid.
16.Intheofficialfigures,thebalanceisnotalwayszero.Agovernmentcannotkeep
trackofeverysingleinternationaltransactionitscitizensengagein,ashardasits
customsagentsandfinancialregulatorsmaytry.Thatcreatestheneedfora
StatisticalDiscrepancylineintheaccounts.In1996thestatisticaldiscrepancyinthe
U.S.balanceofpaymentsamountedto$46billion.Thatmayseemlikealargeamount,

butitrepresentslessthan1.5percentofmorethan$3.1trillionintotaltwoway
transactionsin1996.Forallpracticalpurposes,theflowofmoneyoutoftheUnited
Statesinagivenyearequalstheflowofmoneyin.
17.DouglasA.Irwin,ThreeSimplePrinciplesofTradePolicy,AmericanEnterprise
Institute,Washington,1996,p.19.
18.CouncilofEconomicAdvisers,EconomicReportofthePresident1998,TableB32,
p.319.
19.Ibid.,TableB24,p.308.
20.InternationalMonetaryFund,InternationalFinancialStatisticsYearbook
(Washington:IMF,1997),p.142.
21.EconomicStrategyInstitute,NewESIStudyFindsCausesandCostsofTrade
DeficitMoreComplexThanTraditionalEconomicRhetoric,Pressrelease,October
16,1997.
22.PeterMorici,TheTradeDeficit:WhereDoesItComeFromandWhatDoesIt
Do?EconomicStrategyInstitute,Washington,October1997,p.10.
23.WilliamGreider,OneWorld,ReadyorNot:TheManicLogicofGlobalCapitalism
(NewYork:SimonandSchuster,1997),p.189.
24.RobertC.Shelburne,TheMacroeconomicsofCommercialPolicyandtheTrade
Balance:APolicyPerspective,InternationalTradeJournal10,no.1(Spring1996):
81.
25.Morici,p.9.
26.Movingtoaninvestmentbased,personallymanagedretirementsysteminplaceof
SocialSecuritymightbeonewaytoboostprivatesavings.
27.Thecurrentaccountbalancein1991receivedanadditionalboostofabout$40
billioninthepositivedirectionbecauseoftransferpaymentstotheU.S.government
fromitsGulfWarallies.

28.RobertT.Parry,U.S.TradeDeficitsandInternationalCompetitiveness,Business
Economics,January1994.
29.CouncilofEconomicAdvisers,EconomicReportofthePresident1995
(Washington:GovernmentPrintingOffice,1995),p.236.
30.CuomoCommissiononCompetitiveness,America'sAgenda:Rebuilding
EconomicStrength(Armonk,N.Y.:Sharp,1992),p.11.
31.CouncilofEconomicAdvisers,EconomicReportofthePresident1998,TableB51,
p.340.
32.Ibid.,TableB103,p.398.
33.Ibid.,TableB51,p.340.
34.JointEconomicCommitteeofCongress,EconomicIndicators,December1997,p.
35.
35.Ibid.
36.QuotedinWayneLeighton,PlayingwiththeNumbers:WhyProtectionistsAre
WrongaboutTrade,IssueAnalysis,CitizensforaSoundEconomyFoundation,
Washington,September18,1997,p.1.BuchananmadehisremarkonCNNonMarch
3,1996.
37.SeeCouncilofEconomicAdvisers,EconomicReportofthePresident1998,Table
B103,fortheannualtradedeficitfiguresandTableB42fortheannual
unemploymentrates.
38.Ibid.,Table103.The1998merchandisetradefigurewasreleasedFebruary19,
1998,bytheBureauofEconomicAnalysis,
http://www.census.gov/indicator/www/ustrade.html.
39.CouncilofEconomicAdvisers,EconomicReportofthePresident1998,TableB
46,p.334.
40.Morici,p.19.

41.ForthecurrentaccountasapercentofGDP,seeInternationalMonetaryFund,
InternationalFinancialStatisticsYearbook(Washington:IMF,1997),p.TheU.S.
currentaccountdeficitgrewlargerasapercentofGDPin1982through1987,in1992
through1994,andin1996,and1997.Itshrankin1981,in1988through1991,andin
1995.ForrealGDPgrowthbyyear,seeCouncilofEconomicAdvisers,Economic
ReportofthePresident1998,TableB4,p.285.
42.CouncilofEconomicAdvisers,EconomicReportofthePresident1998,p.249.
43.MarkThomas,Who'sAfraidoftheBigBadTradeDeficit?inSecondThoughts:
MythsandMoralsofU.S.EconomicHistory,ed.D.N.McCloskey(NewYork:
ManhattanInstitute,1993),p.90.
44.MichaelAbramowitz,BaltimorePortIsBackdropforAnotherBuchananAttack
onTradePolicies,WashingtonPost,March3,1996.,p.A10.
45.SeetextofPresidentClinton'sstateoftheunionmessage,WashingtonPost,
January28,1998,p.A24,col.3.
46.U.S.DepartmentofCommerce,SurveyofCurrentBusiness77,no.12(December
1997):D51.

DanielT.GriswoldisassociatedirectoroftheCatoInstitutesCenter
forTradePolicyStudies.

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