Trade Deficit – Symptom of a healthy economy


This year’s trade deficit is forecast to top $700 billion.

That’s a mighty big number–a little less than last year’s record-breaking figure of $764 billion, but still pretty darn large.

To some people, the trade deficit represents a really big problem. They think it’s irredeemably bad–something to be avoided at all costs. The protectionist pundit Pat Buchanan has called the trade deficit a “malignant tumor in the intestines of the U.S. economy.”


Say this about Buchanan: He offers vivid metaphors. As an analyst, however, he’s about as good at economics as is he at colonoscopies. And you wouldn’t trust him to perform one of those, would you?

In truth, the trade deficit is not a sign of weakness–it’s a sign of strength.

On the surface, the trade deficit “suggests” that Americans struggle in the global economy: We just aren’t competitive enough, or other countries don’t play fair with subsidies and tariffs, or both. (And there may be a little truth in that) There’s also a sneaking suspicion that imports displace American production, leading to job losses, especially in manufacturing.

Simply by looking at trade-deficit statistics–and assuming that they’re accurate barometers of economic health–you wouldn’t guess that the United States is the most prosperous nation on the planet. Today, however, we actually live in the wealthiest society that the world has ever known. The people who inhabit the nations with which we run a trade deficit envy our material well-being.

In the last 37 years, the United States has run a trade deficit 34 times. Do you know what happened during those three years when we actually ran trade surpluses? Our economy was in recession.

In other words, a trade deficit correlates strongly with economic growth. The Cato Institute recently studied trade figures going back to the final year of Jimmy Carter’s presidency. Here are its findings:

  • In those years when the trade deficit shrank as a share of GDP, real GDP growth averaged less than 2 percent.

    When the trade deficit grew modestly, between zero and half a percent, GDP growth averaged 3 percent.

  • When the trade deficit grew by more than half a percent, real GDP growth averaged more than 4 percent.
  • It would seem as though a trade deficit isn’t a problem so much as a symptom of a healthy economy. When the U.S. economy is growing, Americans buy more imported products. The country also attracts more foreign capital. In addition, trade deficits are associated with low unemployment.

    If I could take a trade surplus without the baggage of slower growth, less investment, and greater unemployment, I’d gladly do it. Experience tells us, however, that a trade surplus is not a reliable indicator of economic prosperity–except in the negative sense.

    Ronald Reagan once joked that he wasn’t going to worry about the budget deficit–it was big enough to take care of itself. That quip is even more appropriate when applied to the trade deficit. Instead of focusing on this figure to the point of obsession, we should devote our energies to the pursuit of public policies that encourage economic growth.

    We started with a metaphor–Buchanan’s image of a “tumor” on our economic “intestines”–so let’s end with one.

    If you need a hammer, you go to the hardware store and buy one. Then you go home and pound nails. Do you also run a trade deficit with the hardware store? Unless the hardware store buys something from you, the answer is yes.

    But that’s obviously the wrong way of looking at the situation. Buying a hammer at a hardware store simply means that you’ve purchased an item that allows you to complete a job–perhaps to finish your basement, thereby increasing the value of your home.

    It’s not a trade deficit, but rather a mutually beneficial transaction–the very kind that makes our global economy tick.

    Dean Kleckner, an Iowa farmer, chairs Truth About Trade & Technology.

    Dean Kleckner

    Dean Kleckner

    Deceased (1932-2015)

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