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On the trade deficit

Scott Jagow Sep 10, 2009

The chasm between US imports and exports grew by a 16% in July to $32 billion, according to the Commerce Department. While that sounds like a bad thing, it could be a sign of confidence in the economy.

Exports grew 2.2%, indicating growing demand overseas. Imports gained 4.7%, signaling increased business activity in this country.

But overall, is having a trade deficit a negative for the US? University of Maryland economist Peter Morici says yes. He argues the trade deficit caused the recession:

Money spent on Chinese coffee makers and Middle East oil cannot be spent on U.S.-made goods and services, unless offset by exports.

When imports substantially exceed exports, Americans must consume much more than the incomes they earn producing goods and services, or the demand for what they make is inadequate, inventories pile up, layoffs result, and the economy goes into recession.

From 2003 to 2007, Americans borrowed to consume more than they produced but when mortgages failed, the shortfall in demand for domestic products drove up unemployment, choked consumer spending and thrust the economy into recession. Now huge stimulus spending is required to resuscitate business activity.

John Tamny of Real Clear Markets respectfully disagrees. He argues that since individuals and companies, not countries, do the trading, a trade deficit does not signal economic foundering:

Sure enough the country that is Switzerland can lay no physical claim to oil, but its citizens consume quite a bit of it due to their success in other endeavors. Imports, far from impoverishing as Morici claims, are the ultimate compliment because they signal productivity on the part of the importer.

Morici concludes that the trade “deficit” is an economy killer, but since the only kind of trade is the balancing kind that occurs between individuals, the more logical conclusion is that when this supposed deficit increases, our economy is growing for individuals doing what they’re best at and being rewarded with more investment for pursuing their specialty.

It’s an interesting debate. It’s possible both viewpoints are correct. In a recession, an increase in the trade deficit doesn’t necessarily indicate a further slowdown in the economy. Possibly, quite the opposite. On the other hand, running a trade deficit long term might seriously undermine an economy’s foundation.

What do you think?

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