Numbers show trade surplus not all it's cracked up to be

by Daniel T. Griswold

Daniel Griswold is director of the Center for Trade Policy Studies at the Cato Institute in Washington.

November 15, 2005

America's trade deficit is essentially an accounting abstraction. Our attention should focus on what really matters -- economic growth, job creation, industrial output and the free and open markets that promote real growth.

Studies acknowledge what has long been true of the U.S. economy: the trade deficit tends to expand along with the economy and contract when the economy slows. In fact, an analysis of economic data from the last quarter-century shows that a growing deficit (as a percentage of gross domestic product) is associated with faster, not slower, economic growth, as well as rising manufacturing output and falling unemployment.

Since 1980, the U.S. deficit has shrunk as a share of GDP from the previous year in eight different years, it has grown moderately in 10 years and has grown more rapidly in six years. How has the economy fared under each of those three scenarios?

By the most basic measures of economic performance -- GDP, manufacturing output and the unemployment rate -- the U.S. economy performs better in years when the deficit is rising than in years when it is shrinking. And it performs especially well in years when the deficit is rising most rapidly.

The conventional wisdom holds that a trade deficit destroys jobs by supposedly shipping them overseas. But again, the evidence suggests something quite different. In those years of an "improving" deficit, the unemployment rate on average jumped by 0.8 percentage points. In years when the deficit moderately "worsened," the unemployment rate fell by an average of 0.2 points, and in years when the deficit grew the most rapidly, the unemployment rate fell by an even larger average of 0.7 points.

If a rising trade deficit is responsible for "shipping jobs overseas," how do the critics of trade explain the fact that unemployment rises when the trade deficit shrinks and falls when it expands?

Those who seek the Holy Grail of a trade surplus should be careful what they wish for. The last time America's jobless rate reached double digits was the early 1980s, when the deficit was a measly $5 billion.

This article appeared in the Atlanta Journal Constitution on November 15, 2005.