Asian Trade Deficit No Threat To American Economy

Perhaps no aspect of American trade is discussed more and understood less than the trade deficit with China. The trade deficit has been cited as undeniable proof of unfair trade barriers abroad or a lack of competitiveness among American industries at home. It has been blamed for destroying jobs and dragging down economic growth. However, the causes of this deficit are due to a confluence of factors in the economies of both nations.

The U.S. trade deficit results from a net inflow of capital to the United States from the rest of the globe. Because of its stable and relatively unprotected domestic market, America remains the world's most popular destination for foreign investment. America is a net importer of capital because Americans do not save enough to finance all the available investment opportunities within their own economy. The inflow of capital from abroad allows Americans to buy more imports over and above what the country exports. To change the U.S. trade deficit, it would be necessary to change the rate at which Americans save and invest.

Many Americans blame protectionist policies of the Chinese government for the trade deficit with China. Yet, this can not be the only cause of the imbalance, as America also has trade deficits with Canada and Mexico, whose markets are virtually completely open to American products. Also, America runs a large trade surplus with Brazil, a country with relatively high trade barriers. Obviously, Chinese protectionism is not the only cause.

Another purported cause is a lack of American. industrial competitiveness. However, despite some manufacturing jobs moving to cheaper offshore locations, Americans still sell more goods and services in the global marketplace than businesses in any other country. It is the world's third largest country in terms of population, and its economy dwarfs that of every other nation, even China. Not surprisingly, it acts as a magnet for foreign investment and marketing.

It is a myth that trade deficits lead to unemployment in America.destroy jobs. In the last decade, American payrolls have expanded along with the trade deficit. There seems to be more of a correlation between a rising trade deficit and a falling unemployment rate, for the simple reason that the same buoyant economy that leads to a demand for labor also invites capital investment and creates demand for imported goods.

It is also doubtful that trade deficits create a slowdown in the American economy. Since the 1980s, America's economy grew an average of 3.1% in years when the trade deficit expanded compared to the previous year, while growing only 2.0% in years when the deficit shrank. It seems that the trade deficit is the result of a healthy economy, not the cause of a lackluster economy.

It would be more worrisome if America were running a trade surplus. In Mexico in 1995 and more recently in South Korea and other East Asian economies, trade balances reversed rapidly from deficit to surplus because of the flight of foreign investment and plunging domestic demand for manufactured goods. In Japan, a high trade surplus has been accompanied by record high unemployment. It is probably no coincidence that the smallest American trade deficit in recent years occurred in 1991, at the lowest point of the last recession.

Therefore, the current Sino-American trade deficit should not be a cause of concern, since it is a sign that America's economy is continuing to perform well and expand. Since it is a secondary result of American economic growth, legislative measures to bring it down will be at best futile, and at worst disruptive to the nation's economy.