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The US trade deficit is tribute paid to foreigners. And it’s big.

In 26 of the last 27 years, the US has run a trade deficit.

US current account trade surplus or deficit as percent of GDP 1960 to 2008

Trade data and GDP data from US Bureau of Economic Analysis.

When the US exports less in goods and services than it imports, and earns less from its investments abroad than foreigners earn on their investments here, there is increased debt to foreigners, which must be serviced and eventually paid off, and/or transfers to foreigners of title to US assets such as company stock and real estate. Effectively, it's as though foreigners collected a sales tax on all economic activity in the US, essentially a tribute paid by the US to foreigners. The rate has been as high as 6.0 % of Gross Domestic Product, was about 4.9% in 2008, and has averaged 2.9% since 1981.

In 2007, the total tribute paid was $731 billion. That's larger than the Troubled Asset Relief Program ("TARP"), which may take more than a year to disburse. It's almost as large as the multi-year economic stimulus package pending in Congress now. It's larger than all US federal spending on defense in 2007 and more than twice as large as all federal non-defense spending. (BEA link.) It is almost twice as much as federal corporate income taxes in 2007. (Tax Policy Center link.)

The comparative advantage argument for trade liberalization assumes imports and exports will be balanced. (There is a theory about how currency exchange markets will automatically result in balanced trade, but obviously the theory is not operating in the real world.) On the other hand, the older mercantilist idea that national wealth accumulation comes from maximizing exports and minimizing imports has worked splendidly for China in recent years. The US has neither balanced trade nor a trade surplus but, instead, has run a large chronic trade deficit—and there is no reputable theory predicting net benefits from that.

Despite this, free trade ideologues are wringing their hands about the possibility that new political winds may blow in a wave of protectionism. Although it would be unfortunate for the US to adopt illegal tariffs in the name of ending the recession, US trade policy has been broken for 2 to 3 decades and needs a major overhaul. We should start now, not because we are in a recession, but because changes are long overdue.

Fortunately, the recent conventional wisdom that all trade liberalization is good and inevitably produces good results has been shattered. Nobel laureates Paul Samuelson and Paul Krugman and other prominent economists including Dani Rodrik, Alan Blinder, Martin Wolf, Larry Summers, Joseph Stiglitz, and even Alan Greenspan have said that the US middle class is net worse off as a result of the way we have implemented trade liberalization. We need to take a strategic approach to foreign trade and work hard to get the potential net benefits for middle class Americans.

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Reader Comments (1)

In looking at nominal retail sales do not make the mistake of trying to deflate by the CPI to convert to real numbers.The deflator for GAFO sales -- department store type merchandise -- is running at a
minus 2.3 rate year over year and minus 3.6% on a 3 month basis.

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