Welcome to the latest installment of our new series! We’ve rounded up experts in the fields of economics and personal finance to answer common questions young people have about their money and the economy. For this column, we’ve asked an expert on finance and business for his insight on a little-understood topic that’s often in the news–the US trade deficit. Got a question you’d like to see addressed in this space? Shoot us an email at email@example.com.
Today’s expert is Mark Perry, a professor at the University of Michigan-Flint, a visiting scholar at the American Enterprise Institute, and blogger at the website Carpe Diem. At Econ4U, we talk a lot about how you spend your money. But where is that money being sent? And is it a bad thing if we’re buying things made in other countries? We asked Perry for three things you should know about the “trade deficit.”
1. Trade deficits are a positive consequence of cost-conscious American consumers and businesses shopping globally for the best value, quality, and price.
It’s frequently lamented that the United States has a trade deficit with China, Japan, and the rest of the world, meaning we buy more goods and merchandise from those countries than they buy from us. But it’s important to understand that it’s not countries that engage in international trade—it’s American businesses and consumers who actually do the buying and selling. International trade reflects the voluntary behavior of millions of Americans who have collectively found great value by purchasing products—like iPods, trucks, computers, clothing, and so forth—produced overseas.
2. The trade deficit as most people understand it doesn’t exist.
It was recently reported the U.S. had a $141 billion trade deficit with the rest of the world during the first quarter of this year (This means we imported $141 billion more in goods and services into the country than we sent abroad). But what doesn’t get reported is that the trade deficit was exactly offset by a $141 billion foreign investment surplus during the first quarter (This means that foreigners purchased more financial assets like U.S. stocks and bonds than Americans invested overseas). The net result is that America’s total trade with the rest of the world was perfectly balanced in the first quarter of 2011, just like it is in every quarter and every year.
3. Trade deficits are most often associated with periods of strong US economic growth—not decline.
Researchers at the Cato Institute found that, over the last thirty years, the U.S. economy grew at a healthy annual 3.6% pace in those periods when our trade deficit was growing larger—and an annual rate of only 1.0% when the trade deficit was shrinking. A recent example illustrates the relationship: even though it was reported that the trade deficit was “improving” (decreasing) in 2008 and 2009, America at that time was suffering from one of the worst economic downturns and financial crises since the Great Depression.