You shouldn’t miss this new paper by my friend and former Mercatos Center fellow, Dan Griswold, co-authored with Andreas Freytag.. In it, Dan and Professor Freitag brilliantly debunk many of the myths about the downsides of trading. This paper should silence the persistent false alarms that reflect the US trade deficit and encourage US economic decline. But the reality is the opposite. Here are some pieces:
Concerns about trade deficits are intellectual and do not fully address the benefits of trade expansion. In particular, the causes and expected effects of trade deficits are poorly understood, leading to erroneous and self-harming policy conclusions. By comparing the US case with trade surplus countries such as Germany, we explain the causes and consequences of the trade deficit, comparing its effects on manufacturing output and employment. We also explain how the trade balance indicates the country’s strength as a hub for international investment, strengthening trade in goods and services, and a strong dollar that remains the center of the global economy. And finally, we briefly recommend policy measures to strengthen the country’s fundamental business and geopolitical strengths.
The U.S. merchandise trade balance, and, more broadly, the current account, has been in deficit for decades. Year after year, Americans buy more goods on the world market than they sell. This is not a problem that can be solved by tariffs or other trade measures, but deeper economic realities in the economy that can reasonably be seen as signs of strength. The United States can only run a persistent deficit on its current account because it measures cross-border capital flows that run an equal continuous surplus in its financial account. More investment flows into the United States each year because the United States remains a safe and profitable haven for the world’s savings. The investment, in turn, creates growth and jobs.
Critics focus on persistent bilateral trade deficits with key trading partners such as China and the EU, while not focusing on the overall trade deficit. But bilateral imbalances are more meaningful than the overall trade balance. US citizens and companies connect with partners around the world. There is no rational economic reason why Americans should be expected to sell the same goods and services to people in a foreign country.
To illustrate this point, let’s do a thought experiment: imagine that the world consists of three countries with limited but generally balanced trade. Germany buys oil from Saudi Arabia and sells only machinery to the US and sells telecommunications equipment to Saudi Arabia. Germany has a bilateral trade deficit with Saudi Arabia, Saudi Arabia with the US and the United States with Germany. Each country has a balanced trade with the world, but deficits and surpluses with individual trading partners. Binary deficits may reflect perfectly normal comparative advantages and preferences.
In fact, manufacturing output, measured in domestic value, has expanded over the past two decades with persistent annual deficits in merchandise trade. In the year In 2021, the value of manufacturing will reach a record $2.563 trillion, as the merchandise trade deficit continues to exceed 4 percent of GDP. As Figure 4 shows, real U.S. manufacturing prices have risen by more than one-third over the past two decades. From $1.84 trillion in 2000 to $2.5 trillion in 2021. From 3.5 to 6.1 percent of the GDP. While some regions of the country have seen declines in traditional manufacturing, the persistent trade deficit will not be an obstacle to expanding manufacturing production in the United States as a whole.
Beneath the trade deficit headline number is evidence of America’s continued economic strength and influence around the world, including projections of growing soft power in its rivalry with Russia and China. The US trade balance is neither a source nor a sign of weakness, but a reflection of the strength of America’s still relatively open economic system. A look at America’s trade balance with the world shows the economic complexity of the economy, the importance of import freedom, its enduring attraction as a safe and profitable haven for global capital, and the continued dominance of the US dollar—all of which increase America’s influence in the world.
Another sign of strength in the US balance of payments is the country’s openness to imports. The United States is the world’s largest market for goods and services exported to the rest of the world. Since the end of World War II, this situation has increased US influence over international trade rules and alliances. Globally rising import prices also benefit consumers and domestic producers from imports and competitively priced products based on global supply chains. The economy is stronger and stronger because American companies have the ability to source semiconductors and other critical components from many international suppliers. This is true both in the defense sector and in private industry.
A more open economy can stimulate both economic performance by strengthening our relationships with partners and increasing our influence in the world. This was the consensus in Washington in the decades after World War II, but with rising tensions with rivals like China and Russia, it is important to renew our national rhetoric. A commitment to openness reinforces lines of influence such as strong U.S. exports and imports, the continued attractiveness of U.S. foreign investment, and the strength and focus of the U.S. dollar as the world’s most important currency.
Post Griswold and Freytag on the so-called “trade deficit”. It appeared at first Cafe Hayek.
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