On February 11, the U.S. Department of Commerce will release our country’s 2010 trade statistics. The following three principles will help in understanding what the numbers mean:
- Unlike the U.S. budget deficit, the size of the trade deficit does not matter. The trade deficit results from people in other countries spending more dollars investing in our economy than buying U.S.-made goods and services. Every dollar spent by someone in another country to buy U.S. Treasury bonds, purchase stock in a U.S. company, or build a new factory in the United States ultimately adds a dollar to the U.S. trade deficit. Americans benefit whether someone in another country buys a $30,000 Ford Explorer or $30,000 of Ford stock. The first transaction results in a lower trade deficit, and the second results in a higher trade deficit. But that does not mean the first transaction is good and the second is bad.
- Import growth typically indicates a strong, growing economy. Many people believe that imports destroy U.S. jobs, but in fact, the biggest job losses in U.S. history have coincided with decreases in imports. From 1929 to 1932, imports plummeted by 69 percent as we entered the Great Depression, and the unemployment rate increased from 3.3 percent to 23.6 percent. From 2007 to 2009, imports dropped by 17 percent and our unemployment rate more than doubled. In contrast, a growing economy creates new jobs and allows Americans to afford more imports.
- There is no reason to think the United States should have a trade balance with each of our trading partners. We will have a trade surplus with countries that prefer to use their dollars to buy U.S. exports, and we will have a trade deficit with countries that prefer to use their dollars to invest in the U.S. economy.
Keeping these principles in mind, when the government releases its trade statistics next week, it would be wise to ignore any analyst who asserts that a growing trade deficit is harmful, increased imports are a cause for alarm, or trade deficits with individual countries indicate a need for U.S. government intervention.