Don't be fooled by the shrinking trade deficit


Misleading Statistics? Recession-weary Americans, desperate for positive economic news, recently perked up when the federal government released its trade figures. On the surface, the numbers were quite encouraging: The nation's trade deficit in March was only $ 4.05 billion, less than half the average monthly shortfall for 1990 and just 0.9 percent of the gross national product, the lowest level since 1982.

The shrinking trade gap is a welcome development, of course, but before the excitement and expectations build, it is important to understand that the good numbers are largely the result of a bad economy. The recession in the United States is currently dampening demand for imported goods, and this has helped lessen the nation's trade imbalance. A rough rule of thumb, based on statistical analysis of past economic history, is that a 1 percentage point rise in the unemployment rate reduces the U.S. trade deficit by some $ 25 billion.

The other cloud inside a silver lining is that the recent improvement in the U.S. trade position stems primarily from the sharp decline in the dollar between 1985 and 1988. The currency drop-off increased foreign wage rates measured in dollars, so that the United States became a relatively cheap place to build factories and manufacture goods. This allowed U.S. firms to export their products offshore more easily and also induced increasing numbers of European and Japanese companies to produce in this country. Today, wages in the United States are lower than Europe's and only slightly higher than Japan's.

Postponing the Day Of Reckoning. A few years ago, economic pessimists warned that the bulging American trade deficit would eventually lead to a day of reckoning. To pay for its excess imports, the United States must borrow abroad; the prophets of doom cautioned that foreign debt would ultimately become a crushing burden for the nation's economy. But even if offshore credit continues to grow at current rates, that day of reckoning has apparently receded indefinitely into the future. For one thing, contrary to popular belief, America is not really deeply in debt. Although official figures indicate that foreign assets in the United States are much larger than American assets abroad, the market value of U.S. overseas assets exceeds their book value, so that foreigners still probably owe this nation almost as much as it owes them. This is reflected in the fact that America's earnings from offshore assets -- dividends and profits of U.S.-owned companies, for example -- still exceed its corresponding payments to foreigners by $ 7.5 billion. And with the trade deficit at current levels -- just 1.2 percent of the gross national product during the first quarter, down from 3.4 percent of GNP in 1987 -- these payments to foreign investors are expected to grow only slowly.

It is tempting to conclude from this analysis that the competitiveness problem that currently vexes the United States is all but over. But that is far from the truth. Unfortunately, balanced trade is not the only measure of competitiveness. The United States generally ran surpluses on its trade in goods and services until 1982, yet by any other economic measure -- productivity, standard of living, technological leadership -- the nation was steadily losing ground to its foreign rivals across the sea.

Traveling on a Downward Path. It is also worth considering the parallels with the United Kingdom. Thanks to repeated devaluations of the pound, the U.K. regularly balanced its trade accounts during its long economic decline: Between 1960 and 1988, Great Britain's average deficit was just 0.3 percent of its gross national product, equivalent to a U.S. deficit of only $ 15 billion. Yet during that period, Britain lost its long held standing as the richest country in Europe and the second-ranked power in the capitalist world. It went on to become the poorest major nation in Europe while falling to sixth place in the world as a whole. In spite of the recent good news on trade, the United States seems to be following the same downward path.

Closing the gap

After swelling in the mid-1980s, the U.S. trade deficit has begun to shrink.

U.S. merchandise trade deficit, percentage of GNP

1980 0.7 pct.

1981 0.7 pct.

1982 0.9 pct.

1983 1.5 pct.

1984 2.8 pct.

1985 2.9 pct.

1986 3.3 pct.

1987 3.4 pct.

1988 2.4 pct.

1989 2.1 pct.

1990 1.8 pct.

1991 1.2 pct.

Note: Figure for 1991 is for first quarter.

Reaping the dividends

U.S investments abroad yield more than foreign assets in this country, although the amount has been declining until recently.

Net U.S. investment income

1980 $ 28.9 bil.

1981 $ 31.3 bil.

1982 $ 28.3 bil.

1983 $ 27.4 bil.

1984 $ 23.4 bil.

1985 $ 16.2 bil.

1986 $ 11.0 bil.

1987 $ 5.3 bil.

1988 $ 1.6 bil.

1989 -$ .9 bil.

1990 $ 7.5 bil.

Competing on wages

The U.S. trade position has improved, in part, because the nation has become a source of relatively inexpensive labor.

Hourly compensation costs in manufacturing, U.S. dollars

U.S. Japan Germany

1985 $ 12.96 $ 6.43 $ 9.56

1986 $ 13.21 $ 9.31 $ 13.29

1987 $ 13.40 $ 10.83 $ 16.91

1988 $ 13.85 $ 12.80 $ 18.11

1989 $ 14.31 $ 12.63 $ 17.58

Originally published, 6.10.91