False Alarms on the Trade Deficit
An alarmist consensus is emerging among economic forecasters and commentators that the U.S. trade deficit in 1998 and 1999 will "soar," "surge" and reach "extreme levels." Prudent observers should treat this consensus, like others arrived at by economic forecasters, with a healthy degree of skepticism. As the Nobel Prize-winning economist Paul Samuelson once noted, "Economists have correctly predicted nine of the last five recessions."</br></br>In the present case, even if the forecast of a soaring U.S. trade deficit were closer to the mark than it is likely to be, its limited significance would not warrant the alarm that commentators are sounding. The reason is that the trade deficit is one of the least significant indicators of the economy's vitality and health (as Walter Wriston and I explained on this page last June 19).</br></br>In any event, the consensus view that the trade deficit -- to be more precise, the current-account deficit, which measures the excess of payments for imports of goods and services (including capital services) over earnings from the corresponding exports -- will soar is based on several seemingly persuasive arguments.</br></br>First, U.S. markets will experience a "flood" of cheap exports from Asia following the depreciation of many Asian currencies by more than 50% in the past year, and of the Japanese yen by more than 25% in the past two years.</br></br>Second, so the argument runs, U.S. exports to Asia, which represented about 25% of global U.S. exports, will decline sharply for a number of reasons stemming from Asia's financial turmoil: the severe setback to economic growth in Korea and Southeast Asia; continued stagnation in Japan; the appreciated U.S. dollar, which makes U.S. exports more expensive to foreign buyers; the depleted holdings of dollar assets in the Asian countries (apart from Japan, China, Hong Kong and Taiwan); and the austerity imposed on the Asian countries by the International Monetary Fund.