Does it bother you that you run a trade deficit with your grocery store? You probably bought thousands of dollars’ worth of food from it over the past year without selling anything back. Sound nonsensical? Worrying about the nation’s trade deficit is just as silly. And yet, Senate Majority Leader Harry Reid (D-Nev.) says the trade deficit costs the country millions of jobs. Presumptive Republican presidential nominee Mitt Romney slams President Obama for “doing nothing to address” the gap.
Stores sell you things that are uneconomical to make yourself, for which you pay money that you earn by working. It simply doesn’t make sense for you to produce everything for yourself — your time is much better spent doing those productive activities for which your skills are better suited. In fact, you benefit from that deficit, because you need groceries. We all have lots of trade deficits in our lives we don’t worry about, because we know they benefit us. So why is it that we think a U.S. trade deficit justifies bureaucratic meddling in business affairs?
Buying more products from China than we sell them is not a sign of economic weakness; we expect rich countries like ours to be able to purchase more goods than can developing countries like China. Our ability to buy inexpensive foreign products is critical to economic health — consumer spending makes up a majority of our GDP. But politicians demonize it by pointing to the trade deficit as a supposed sign of economic weakness. In fact, it can be exactly the opposite.
A trade deficit indicates consumers are buying enough products to keep growth humming along. When the trade deficit shrinks, it is usually accompanied by a recession — as happened in 1973, 1980, 1991, 2001 and 2009. We ran sustained trade surpluses during the Great Depression. Imports also help our economy in other ways. When we buy foreign products, overseas investors put their dollars right back here, creating millions of jobs. One of the most important elements in our economic recovery right now is our $4 trillion in net foreign investment — by far the largest in the world.
To worry about a “trade deficit” is to ignore the fact that many goods are truly global creations, which makes traditional measures of trade inadequate. For example, suppliers from lots of countries have a role in creating the Apple iPhone. The research and design happens in Silicon Valley, a dozen component parts are produced in America, Germany, South Korea and Japan, and it’s all sent to China to be assembled. The Chinese contribution to this global supply chain is just 3.6% of the final value, but the way the trade statistics tell it, the iPhone is a “Chinese” import. What should be considered the greatest contribution — the American vision and technological architecture that made the iPhone possible — counts for zilch.
Worldwide manufacturing is a natural function of a complex global economy that minimizes costs at every stage of the production process. Similar supply chains exist for hundreds of other products. World Trade Organization Director-General Pascal Lamy has estimated that accurately measured trade statistics would halve our trade deficit with China. This discrepancy exists because in a high-tech economy like ours, the production of ideas is crucial, but ignored by bean counters.
In addition to helping to make our gadgets affordable for everyone, foreign manufacturing also gives American workers the latitude to specialize in high-tech fields — exactly what we need to compete in the global economy of tomorrow. By using flawed methodology, we disparage the very sort of business we should be trying to attract.
If trade deficits were a problem, the U.S. would have plunged into a permanent state of disrepair in the decades following 1975, the last year the country ran a surplus. Instead, we have experienced a threefold increase in manufacturing productivity, a ninefold increase in GDP and a sixfold increase in per capita income. It’s time for pundits and politicians to stop demonizing one of the most important factors in getting the American economy going again.
Carter Lockwood is a research associate at the Competitive Enterprise Institute.