Daniel Griswold

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A Convenient Truth The Real Story behind
Americas Trade Deficit

• Daniel Griswold
• Cato Hill Briefing
• March 21, 2007

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Why We Trade with Foreigners

• Adam Smithdivision of labor
• Ricardocomparative advantage
• Exportseconomies of scale
• Import competitionlower prices, choice, quality
• Producers as importerssteel and sugar
• Competition promotes innovation and growth

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The truth about trade

• Mercantilist mindset Exports good, imports
  bad.
• Who gains most from farm trade reform? The
  reformers!
• OECD farm trade liberalization
• OECD countries gain 92 billion,
• poor countries 10 billion (IMF).

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What about Global Imbalancesthat is, the big,
bad trade deficit?

• No aspect of international trade is so widely
  discussed and yet so little understood as the
  trade deficit.
• To mercantilists, a trade deficit is by
  definition a sign of failure

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Let me explain it to you one more time, Lou.
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The Trade Deficit that Ate America

• ''The consequences of these persistent and
  massive trade deficits include not only failed
  businesses, displaced workers, lower real wages
  and rising inequality, but also permanent
  devastation of our communities.'
• -- Democratic congressional leaders, February
  13, 2007, letter to Bush

House Speaker Nancy Pelosi
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Americas trade balances, 2006
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Balancing our International Books
Current Account
Financial Account
Trade in Goods and Services
Trade in Assets
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A Bit of Trade Deficit Algebra

• Y (GDP) C G I (Ex-Im)
• Y - C - G - I Ex-Im
• (Y-C-T) (T-G) - I Ex-Im
• S(p) S(g) - I Ex-Im
• S - I Ex-Im
• Net exports Savings - Investment

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Implications for U.S. policy

• Trade deficits are immune to trade policy.
• Changing the trade deficit requires changing the
  savings and investment balance.
• Trade deficits tend to be
• pro-cyclical. (S I Net Exports)

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Are Trade Deficits A Drag on U.S. GDP Growth?
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High Import, High Output
Low Import, Low Output
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A word about trade and jobs

• Trade is not about more or fewer jobs, but about
  better jobstrading up.
• Trade displaces workersabout 400k/year.
• Compare to 140 million in workforce, 300k
  unemployed each week, 15 million jobs eliminated
  each year.
• Trade accounts for lt 3 of job churn.
• Internal competition, changing consumer demands,
  new technology more important.

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Is the trade deficit sustainable?

• Net international investment position
• America a debtor nation since mid-1980snow
  2.5 trillion.
• Foreigners own 13.6 trillion in U.S. assets,
  Americans own 11.1 trillion in assets abroad at
  end of 2005.
• Foreign debt 20 percent of GDP,
• lt 5 percent of national wealth.

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Is the trade deficit sustainable?

• In 2006, Americans earned 622 billion on
  investments abroad, paid 629 billion on foreign
  investments in U.S.
• U.S. paid net -7 billion on income.
• Benefits of foreign capital
• less crowding out from fiscal deficit
• lower domestic interest rates
• mortgage savings 1,500/year

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Americas economic sovereignty

• Foreigners own 1/4 of outstanding 8 b federal
  debt, private U.S. citizens 1/4, government
  itself owns 1/2,
• Chinese own 350 billion, lt5 of U.S. debt
• Gives foreigners stake in U.S. prosperity
• Exercise of U.S. sovereignty to engage in global
  economy, realize its benefits

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For more information

• www.freetrade.org
• dgriswold_at_cato.org
• 202-789-5260