REVIEW & OUTLOOK (Editorial): A Trade Deficit Primer
As an April 30 deadline looms, the tom-toms of trade war are once again beating at George Bush to take a "Super 301" swipe at Japan, and maybe South Korea too. It's time to repeat that the conventional wisdom on trade deficits has it all exactly backward.</br></br>The U.S. does not have a trade deficit with Japan because this country consumes too much and must therefore borrow to pay the bill. The trade deficit exists because Japan has to find somewhere to invest its huge pool of savings. The United States, which happens to be a very good place to invest, then buys Toyotas to recycle those savings back to Japan through the trade account. In other words, the trade deficit is a sign of American economic vigor, not weakness.</br></br>We know this may sound startling, because the conventional wisdom has deemed that somehow there is a perfect trade "balance," presumably at or close to zero. This logic ignores the central truth of foreign trade flows: There can't be a trade deficit without offsetting capital inflows. The trade deficit or surplus is merely an accounting identity.</br></br>To refresh some memories on this point, it's worth reprinting the 1976 conclusions of the U.S. Advisory Committee on the Presentation of Balance of Payments Statistics. This was not a group of economic yahoos, but included Morgan Guaranty's Rimmer de Vries, Brookings's Walter Salant and Charles Schwartz of the International Monetary Fund. The committee said:</br></br>"The words `surplus' and `deficit' should be avoided insofar as possible. . . . These words are frequently taken to mean that the developments are `good' or `bad' respectively. Since that interpretation is often incorrect, the terms may be widely misunderstood and used in lieu of analysis."