The US trade deficit, however measured, is large and rising. This year or next, the excess of imports could reach an all-time high of $400 billion (almost 4 percent of expected gross domestic product). To date, however, the basic statistics on the US economy's performance do not reflect any adverse impact. If anything, the reverse is happening.
The surge of imports enables Americans to enjoy a rising standard of living with a minimum of inflation. In the short run, we experience a sustained high rate of economic growth and rising productivity, as well as low inflation and unemployment. But the large trade deficit generates serious longer-run concerns because of (1) its potential for adverse impacts on the overall economy, and (2) its sectoral impacts and the burden born by those who may be hurt by trade.
Looking first at the overall economy, financing an annual trade deficit of $400 billion means the US has to obtain an equally large amount of new foreign capital. The attractiveness of the US as a destination for capital enabled it to easily entice the funds required last year. (The trade deficit was about $300 billion.) However, the likelihood that large trade deficits will endure for some time into the future means that the US will continue to be heavily dependent on overseas investors.
Thus, the US has become more vulnerable to developments in the financial and economic sectors of other nations, raising several problems. Under such circumstances, monetary policy can't be conducted solely in response to domestic considerations. Interest rates at home, for example, can be influenced by international developments.
A second issue is whether the high trade deficits and reliance on foreign capital can be sustained. In the view of many knowledgeable analysts, trade deficits of the current magnitude are not indefinitely sustainable. Opinions differ as to how long current conditions can last and under what circumstances the trade deficit will decline.
Optimists believe that reasonable adjustments in the exchanged value of the dollar, together with economic recovery abroad and an expected slowdown in the US economy, will produce a "soft landing." In this case, the trade deficit comes down substantially in a normal adjustment process that would not generate significant adverse effects on the US. The pessimists worry about a "hard landing." An event such as a sharp decline in the stock market could make the US less attractive as a destination for foreign capital. Such a change could engender higher interest rates to attract the necessary funds to finance the trade deficit. The result could be a slowdown in the economy or even a recession. The value of the dollar could plunge as the economy loses favor with foreign investors. A sharp drop in the dollar's value would raise the cost of imported goods, increasing inflationary pressures and lowering US living standards.
Nobody really knows which of these scenarios - or a different one - will occur. The impacts of the trade deficit on individual economic sectors are complicated. Major activities, such as international trade, generate both winners and losers. Companies in key industries - and their employees and communities - have lost out to imports.
The challenge to policymakers is to develop courses of action that help those who are hurt without doing far more harm to those who benefit from the international marketplace. It is not useful to tell those who say they are harmed by world commerce that far more people have benefited, especially if the harm is attributable to unfair foreign trade practices. Policies must be developed that constructively improve the economic position of Americans rather than merely redistribute the pain from economic change. To be effective and sustainable in the long run, these policies must emphasize not closing markets, but opening them.
*Murray Weidenbaum is chairman of the Center for the Study of American Business at Washington University in St. Louis.
(c) Copyright 2000. The Christian Science Publishing Society