Trade Deficits Always Matter

Abstract

As America grapples over what to do in order to avoid the perils associated with manifest U.S. economic growth that has been characterized as barely enough to forestall another recession, the nation is mired in economic limbo due to, among other causes, the absence of a clearly stated international trade agenda, limited new trade deals, and a lack of concentration on economic growth.

Without fiscal clarity, the ability for the U.S. to withstand the burgeoning recessive pressures may prove futile. Meanwhile, Chinas economy continues to rise, albeit slowly, no doubt reflecting the persistent U.S. slowdown. Europe, not surprisingly, remains in turmoil as European Union naysayers predictions of dismantling a system designed to prevent abysmal economic performance through uniting various entitlement-minded societies has not yet been vanquished by the positive effects of raising taxes and capital productivity while lowering pensioners and social program benefits.

The battle for supremacy in this newly dubbed G-Zero world hence remains unclear as governments decide what policies to effectuate and which to eradicate. In the past, economists have downplayed the corrosive effect that continuous ballooning international trade imbalances would have on economic growth.

Finding a meaningful solution to the overall affects that running a persistent trade deficit with other nations has on a national economy has considerable implications. For those economic historians who have studied the U.S. - Japanese trade deficit, for example, a solution to the question of whether a trade deficit is sustainable remains high on the list of questions for which the answers are not altogether clear. Furthermore, the politicians and their supportive economic advisers provide prescriptive advice to the nation's leaders on how to shape trade policy with China, for example, would be enormously benefited by a better understanding of the trade deficit in historical context (say, with Japan) as they shape future trade relations of the U.S. What policy is best for the U.S. economy? Do trade deficits indeed matter?