The Trade Deficit: Myths and Realities : Contrary to General Belief, Imports Add to a Country’s Resources and Economy

In popular discussions of economic matters, frequent repetition of erroneous or dubious propositions sometimes results in their public acceptance. Frequently, familiarity with the propositions, rather than their accuracy, accounts for the conventional wisdom.

Consider the following bits of conventional wisdom concerning the U.S. trade deficit:

A trade surplus contributes to economic strength, while a trade deficit detracts from it; the recent U.S. trade deficit has occurred because U.S. exports are unable to compete in protected foreign markets; some form of U.S. protectionism is desirable to protect and defend our economic recovery, and the trade deficit signifies a loss of American jobs and increased unemployment.

Each of these commonly accepted beliefs is either wrong or at best is only a small piece of a much larger, and sharply contrasting, truth. Accuracy would warrant correction or major reformulation of each proposition along the following lines:

First, exports actually subtract from a country’s available resources, while imports add resources and thereby provide the means by which the importing economy can invest more and consume more than it otherwise would be able to do. Contrary to the conventional wisdom, the principal purpose of trade is to obtain imports, not to hand over exports. Exports are the means to obtain imports, not the other way around. Imports enhance the economy’s capabilities, while exports diminish them. Consequently, an export “surplus� actually depletes an economy’s strength, while an import surplus (trade deficit) increases it. Although it is true that the U.S. trade deficit cannot and will not go on forever, that should be neither surprising nor disquieting--worthwhile and beneficial circumstances rarely endure forever.

Second, the U.S. trade deficit has grown not because U.S. exports have fallen but rather because U.S. imports have increased substantially. That U.S. exports can and do compete effectively in foreign markets is indicated by the fact that between 1983 and 1985 U.S. exports increased from $200 billion to about $220 billion at the same time as the trade deficit was rising from $62 billion to more than $130 billion. Of course, the explanation for the increased trade deficit is the sharp rise in U.S. imports: from $263 billion in 1983 to about $350 billion in 1985. It is no doubt true that U.S. exports could increase considerably more than they have done if the protective trade practices of other countries were liberalized, and if the dollar’s exchange value were somewhat reduced. Nevertheless, it still makes far more sense to view the U.S. trade deficit--for good or for ill--as due to the insufficient ability of U.S. domestic production to compete effectively with imports within the U.S. market, rather than to the inability of our exports to compete in foreign markets.

Third, inasmuch as substantial real economic growth has been sustained in theUnited States during the past few years notwithstanding the increased trade deficit, protectionism can hardly be advocated as necessary to “protect� or “defend� the U.S. recovery. On the contrary, since, as noted above, the deficit itself provides substantial benefits to the U.S. economy, advocates of protectionism in the United States should realize that their advocacy actually amounts not to a defense of the recovery but rather to an attack on consumers and investors.

Finally, while it is true that larger exports generally contribute to more jobs (although in certain instances that is not necessarily so), it is no less true that expanded imports also contribute to more jobs: for example, in the processing and fabrication of imported raw materials and unfinished goods, and in the packaging, distribution, marketing and servicing of end products. Moreover, the capital inflow that counterbalances the trade and current account deficits plainly adds to jobs because the inflow finances additional domestic investment.

The bottom line, of course, is that the U.S. economy has in fact been an employment engine compared with the economies of Western Europe and even Japan. U.S. civilian employment increased by 7 million jobs between 1983 and 1985, while the trade deficit was growing from $62 billion to more than $130 billion.

“Economics,� it has been remarked, “is common sense made difficult.� Much of the recent public discussion of the U.S. trade deficit suggests a different relationship: Faulty economics impedes common sense, while good economics (plus a few facts) can help it.