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Trade Deficit Study Has “Misguided” Focus, Think Tank Says

Thursday, May 11, 2017
Sandler, Travis & Rosenberg Trade Report

A forthcoming report on significant bilateral U.S. trade deficits has a “misguided” focus on the alleged unfair trade practices of foreign countries, according to a recent article from the Peterson Institute for International Economics. A report exploring the macroeconomic causes and consequences of the aggregate trade balance would provide more insight, the article states, but singling out individual countries according to bilateral deficits “does not make economic sense.” 

The article states that the U.S. runs an overall trade deficit because its citizens spend more than they earn and finance the difference with foreign credit. As a result, policies that encourage people, businesses, or the government to save will have a bigger impact on improving the trade deficit than trade policy, which has only a negligible effect on the deficit. The overall imbalance does fall more on some countries than others, creating significant bilateral deficits in some cases, but these deficits are a symptom of the aggregate trade balance and not its cause.

Further, the article states, bilateral deficits have more to do with country characteristics than unfair trade practices. For example, the U.S. has a large trade deficit with Germany and a large surplus with the Netherlands despite the fact that both countries have the same trade policy as members of the European Union. The difference is that Germany makes goods the U.S. wants, like cars and machinery, while the U.S. makes goods the Netherlands wants, like medical equipment and pharmaceuticals. Similarly, the $250 billion surplus the U.S. runs in services trade does not mean the U.S. engages in unfair trade practices but instead results from the fact that the U.S. is relatively more efficient at producing many traded services that other countries need.

There are some reasons to be concerned about the U.S.’ aggregate trade deficit, the article states, and the long-term causes and consequences of persistent trade deficits do need to be better understood. However, a solution is unlikely to be found in the unfair trade practices of foreign countries. In fact, research shows that countries with higher import tariffs tend to have larger trade deficits and that trade liberalization does not affect trade balances. Instead, the article recommends, the administration’s report on bilateral trade deficits should consider the macroeconomic causes and consequences of the aggregate trade balance and take into account trade in value added, not only gross trade flows.

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