Trade Deficit Myths
A case study in protectionist misinformation.
June 8, 2015 6:53 p.m. ET
In the fight against freer trade, Democratic Representative Rosa DeLauro plays Robin to Senator Elizabeth Warren’s Batman. So with the House due to vote on trade-promotion legislation this month, it’s worth examining Ms. DeLauro’s slippery claims about the U.S. trade deficit.
Two years ago the Connecticut lawmaker led 151 Democrats in opposing presidential trade authority, blocking President Obama’s trade ambitions until after the midterm elections. Today, as the Trans-Pacific Partnership (TPP) tops Washington’s agenda, Ms. DeLauro says it “would increase the trade deficit, loss of jobs and depression of wages.” She has accused the Administration’s top trade negotiator, Michael Froman, of “plainly misleading” Congress about America’s trade balance with its free-trade partners.
The first problem with Ms. DeLauro’s charge is that running a trade deficit—that is, having more imports than exports—isn’t necessarily bad. In the U.S. it can signal economic health: that American consumers and businesses are saving money by buying cheaper foreign goods, and that the U.S. economy is attracting overseas investment, which drives productivity and demand for domestic and imported goods.
That’s why the U.S. trade deficit, which was about $41 billion in April, generally expands during periods of economic growth, when Americans can demand more goods from the global market and attract more foreign investment. During economic slowdowns the deficit shrinks, as after the 2008 financial crisis. It even turned into a surplus during the 1990-1991 recession and the Great Depression.
Ms. DeLauro also has it wrong on the simple trade math. She says America’s trade balance with its 20 free-trade partners (Canada, Mexico, South Korea, etc.) is a $105 billion deficit, when in fact it is a $10 billion surplus. Big difference.
The root of Ms. DeLauro’s mistake is that in counting U.S. exports she excludes “re-exports,” or goods that arrive in the U.S. as imports but leave unchanged as exports. So if a car dealer in Seattle imports 50 BMWs but sells 20 of them in Canada, she subtracts the value of those 20 re-exported autos from the U.S. export total.
Yet Ms. DeLauro conveniently fails to eliminate re-exports from the import side of the equation, thereby inflating imports relative to exports and concocting a trade deficit where none exists. Such accounting wouldn’t fly in a basic algebra course, but it passes for politics on Capitol Hill.
In an April letter reviewed by the Journal, U.S. Trade Representative Froman and Commerce Secretary Penny Pritzker blasted Ms. DeLauro’s distortions as inconsistent “with the economic reality of trade and widely accepted and applied international guidelines for calculating trade balances.”
They explained further that “it is not correct to assume that every import displaces U.S. jobs. Indeed, many imports are goods we do not produce in the United States and half of U.S. imports are intermediate goods that go into supporting U.S. production.” Amen.
Ms. DeLauro and other protectionists need to obscure these facts because the case that free trade raises overall American living standards is so overwhelming. Republicans shouldn’t let such misinformation prevail.
Two years ago the Connecticut lawmaker led 151 Democrats in opposing presidential trade authority, blocking President Obama’s trade ambitions until after the midterm elections. Today, as the Trans-Pacific Partnership (TPP) tops Washington’s agenda, Ms. DeLauro says it “would increase the trade deficit, loss of jobs and depression of wages.” She has accused the Administration’s top trade negotiator, Michael Froman, of “plainly misleading” Congress about America’s trade balance with its free-trade partners.
The first problem with Ms. DeLauro’s charge is that running a trade deficit—that is, having more imports than exports—isn’t necessarily bad. In the U.S. it can signal economic health: that American consumers and businesses are saving money by buying cheaper foreign goods, and that the U.S. economy is attracting overseas investment, which drives productivity and demand for domestic and imported goods.
That’s why the U.S. trade deficit, which was about $41 billion in April, generally expands during periods of economic growth, when Americans can demand more goods from the global market and attract more foreign investment. During economic slowdowns the deficit shrinks, as after the 2008 financial crisis. It even turned into a surplus during the 1990-1991 recession and the Great Depression.
Ms. DeLauro also has it wrong on the simple trade math. She says America’s trade balance with its 20 free-trade partners (Canada, Mexico, South Korea, etc.) is a $105 billion deficit, when in fact it is a $10 billion surplus. Big difference.
The root of Ms. DeLauro’s mistake is that in counting U.S. exports she excludes “re-exports,” or goods that arrive in the U.S. as imports but leave unchanged as exports. So if a car dealer in Seattle imports 50 BMWs but sells 20 of them in Canada, she subtracts the value of those 20 re-exported autos from the U.S. export total.
Yet Ms. DeLauro conveniently fails to eliminate re-exports from the import side of the equation, thereby inflating imports relative to exports and concocting a trade deficit where none exists. Such accounting wouldn’t fly in a basic algebra course, but it passes for politics on Capitol Hill.
In an April letter reviewed by the Journal, U.S. Trade Representative Froman and Commerce Secretary Penny Pritzker blasted Ms. DeLauro’s distortions as inconsistent “with the economic reality of trade and widely accepted and applied international guidelines for calculating trade balances.”
They explained further that “it is not correct to assume that every import displaces U.S. jobs. Indeed, many imports are goods we do not produce in the United States and half of U.S. imports are intermediate goods that go into supporting U.S. production.” Amen.
Ms. DeLauro and other protectionists need to obscure these facts because the case that free trade raises overall American living standards is so overwhelming. Republicans shouldn’t let such misinformation prevail.
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