As the country moves into a new year, most of the economic indicators are looking up. Indeed, 2004 is expected to be the best year, thus far, of the ‘00’ decade, with substantial gains being registered in economic growth, jobs, income, and stock market returns.
But there’s one nagging economic issue that doesn’t seem to be getting better — the trade deficit. As a country, we continue to import more products than we export. The United States has run a trade deficit annually for more than 20 years. In 2002, the deficit was $483 billion, and in 2003 it was likely just as large or larger.
Analogies are often made between national economic situations and family personal finance. So most families know if they continually spend more than they earn, they will ultimately face financial trouble.
Some like to make the same statement for the nation regarding the trade deficit. If the United States continually buys more products from other countries than it sells to those countries, then won’t this eventually mean monetary trouble for our country? Just like a person running up large credit card debts, doesn’t a trade deficit mean the country is living beyond its collective means?
However, two adjustments must be made to put the trade deficit in perspective. First, there is also world trade in services. For example, when U.S. legal firms or construction companies have contracts in foreign countries, this is counted as exports of services from the United States to those countries. Or, when foreign tourists come to Disney World or to our North Carolina beaches, mountains, and golf courses, these are also exports of services from the United States to the home countries of the tourists.
The United States actually runs a trade surplus in services, amounting to $65 billion in 2002. So when world trade in both products and services is considered, the U.S. trade deficit in 2002 was $418 billion.
Second, it’s important to keep the trade deficit in perspective. Certainly $418 billion is an incomprehensible number to any person. But the entire U.S. economy generates almost $11 trillion of income each year. The trade deficit was therefore less than 4 percent of the U.S. economy in 2002.
Yet, the broader question is whether a trade deficit causes damage to the economy. Certainly a trade deficit represents sales that go to foreign companies and workers rather than to U.S. companies and workers, and so, on this basis alone, a trade deficit costs the United States both jobs and income.
But there are several responses to this fundamental concern about a trade deficit. If a trade deficit results because some U.S. buyers are finding better bargains from foreign producers, then the U.S. economy is actually made better-off from the foreign purchases.
For example, the main reason the United States buys so much foreign oil is that the oil is cheaper and of better quality than much of the oil that could be pumped in the United States. Using foreign oil allows all of us to pay less for gasoline, and therefore we have more money remaining to spend on other things.
A trade deficit can also be a sign a country is growing faster than foreign countries. In this case, the country’s appetite for products and services is so great that it must be partially supplied by foreign producers.
But perhaps the biggest misconception about a trade deficit is what happens to the dollars that are paid to foreign companies. There’s a sense among some people these dollars are lost or hoarded.
Actually, the dollars come back to the United States in the form of foreign investments. Foreign owners invest the dollars in U.S. stocks, bonds, land, companies, farms, and factories. And these foreign investments create jobs and income in the United States.
In fact, in any year, the dollars lost through the trade deficit to foreign countries are virtually counterbalanced by the dollars invested in the United States by foreign countries. So, essentially we pay for our greater purchase of foreign products by giving up ownership of some U.S. assets to foreign owners.
Does this means we’re gradually selling off America? Recent trends would suggest not. The share of U.S. land and financial assets owned by foreigners hasn’t changed much in 20 years, and stands at less than 10 percent. So although there are many economic issues in our country that may concern you, the trade deficit probably shouldn’t be one of them.