Forget Trade Deficits: Go for Growth

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<big>Forget Trade Deficits: Go for Growth</big>

by Daniel Griswold

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

The recent London meeting of finance ministers from the Group of Seven leading industrial countries focused attention on the size and implications of the huge US current account deficit, which reached a record Dollars 618bn in 2004, according to figures released this month. In a report on the global economy, the United Nations recently joined the chorus of concerns, noting along the way that the vigorous US economy was one of the main drivers behind the record trade deficit.

Strong growth in the US has stoked demand for imports of not just consumer goods but also the capital machinery, components and raw materials needed by an expanding business sector. Meanwhile, sluggish growth in western Europe and Japan has damped demand for US exports.

The UN study acknowledges what has long been true of the US 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 current account 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 US current account deficit has shrunk as a share of GDP from the previous year in eight different years, it has grown moderately (by half a percentage point of GDP or less) in 10 years and has grown more rapidly in six years. How has the US economy fared under each of those three current account scenarios?

Full article here:
http://www.cato.org/pub_display.php?pub_id=3693

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