Trade deficit not sign of weakness

The U.S. Department of Commerce recently released a report showing that the present U.S…. The U.S. Department of Commerce recently released a report showing that the present U.S. trade gap has widened to 6.5 percent, or $764 billion. The report showed a gap of $233 billion with China, $117 billion with the EU, and $88 billion with Japan. This report immediately triggered a chorus of politicians demanding the Bush administration to create a complete and wide-ranging plan to deal with this record-breaking trade deficit.

In a letter to President Bush, Speaker of the House Nancy Pelosi and other House Democrats asked for “[Bush] to join us and develop a meaningful action plan that addresses the burgeoning deficit.” They also issued an ultimatum to Bush saying, “We call upon the administration to present Congress within 90 days a comprehensive plan to eliminate the surging trade deficits with these ‘Big 3’ economies.”

Are these calls for protectionism by Democrats justified? Is a massive trade gap as horrible as some politicians would like to make us believe? And more importantly, is this trade deficit bad for American consumers and citizens?

The trade deficit is one of the most talked about but least understood aspects of an economy. A rise in the trade deficit or a rise in imports is often portrayed to be a direct cause of unemployment, decreased economic growth and hurt domestic production. Because the benefits of a trade deficit are not evenly distributed, there will always be someone who suffers and others who benefit. Overall, the conventional wisdom that increased trade deficits cause the economy to deteriorate is false.

Conventional wisdom says that as more and more goods are imported and the trade deficit increases, less will be bought from domestic producers, and domestic producers will become unemployed.

This idea may make a good line in a campaign speech but actual events do not back it up.

According to research published by the Cato Institute, during periods when the trade deficit shrank, domestic unemployment jumped by 0.8 percent. Conversely, during periods when the trade gap widened, unemployment dropped 0.7 percent. The increased trade deficit did not create the rise in unemployment that people anticipated.

Conventional wisdom suggests that as the trade deficit increases, the economy should weaken. Actual events indicate that this is not true. Since 1980, when the deficit has declined, America has seen an average of 1.9 percent growth in real Gross Domestic Product. However, in the years America has seen the deficit moderately widen, growth has been 3 percent. Shockingly, during the periods when the deficit has widened at the fastest rate, GDP rose 4.4 percent. An increase in the trade deficit and an increase in domestic economic growth seem to be positively related.

The trade deficit obviously did not create jobs or single-handedly raise GDP. During periods of expansion and growth, demand by consumers and producers is greatly increased. This increased demand causes more things to be imported to satisfy their needs. As economies expand, more jobs need to be filled, reducing unemployment and increasing consumer demand even more.

Over half of the trade deficit is not final consumer goods. Over half of the deficit consists of capital goods or industrial supplies and materials. This includes petroleum, steel, raw materials and semiconductors. With lower cost inputs, domestic companies can produce products cheaper. This decrease in cost leads to increased employment and lower cost to the consumer.

A widening trade deficit does not cause an economy to grow, and it does not stop a growing economy from slowing down. An increasing trade gap is a sign of an economy in expansion.

If politicians want to preserve current make-up of the economy and decrease the trade deficit, they should not focus on protectionist tactics such as quotas, tariffs and subsidies. They should focus on stopping technology.

Technology has taken away more jobs than free trade ever will. The computer alone has destroyed many jobs that were common decades ago. The computer allows people to do their own taxes, type their own letters, keep track of financial records and process their own photographs. Why talk to a bank teller when you can go to an ATM? Why send a letter when an e-mail is faster and cheaper?

Stopping the spread of technology is ridiculous and so is trying to stop free trade. Economies change over time. America was once a great manufacturing country and in many regards it still is. But as America becomes technologically advanced, it becomes more cost effective to let other countries do the manufacturing so we can allocate resources more efficiently.

America’s record trade deficit is not an economic problem. It is the benign consequence of a persistent surplus of foreign capital flowing into the United States. That additional capital has helped to make U.S. workers more productive, raising living standards above what they would be without it and building the foundation for future growth.

I love my imported goods – do you? E-mail Joe at jjm43@pitt.edu