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July 21, 1987
"Blame Debt: Federal Spending Binge Fuels Trade Woes"
San Jose Mercury News
By Timothy Taylor
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DISCUSSIONS of the U.S. trade deficit often presume that only two culprits are possible: American businessmen unskilled in foreign marketing or wily foreign governments that shut out American exports.

These explanations have clear political advantages. After all, the Japanese and Germans don't vote for Congress, and the incompetence of businessmen is clear to almost everyone who has never tried to run a business.

But however seductive these explanations are, they don't come close to fitting the facts. Recovering credit junkies learn that the first step toward recovery is acknowledging that their debt problem is their own, not something for which banks or credit card companies or Macy's or Sears owe a responsibility. Congress and the president need to learn a similar lesson. America's trade and debt problems are the fault of an American consumption and borrowing binge, led by the huge federal budget deficits.

Any plausible explanation for the trade deficit needs to explain why it increased so dramatically since 1982. After all, the United States imported roughly $30 billion more than it exported every year from 1977 until 1982. But the trade deficit doubled in 1983, has doubled again since then, and shows little sign of decreasing.

Since 1982, the U.S. trade balance worsened with all 10 of its top trading partners, and with 19 of its top 20 trading partners. Also, the trade balance got worse in nine of the 10 industrial categories used to classify trade. The 1987 trade deficit will likely match or exceed last year's record of $170 billion.

If incompetent American businessmen are the main cause of the trade deficit, then incompetence must suddenly have risen five-fold in every industry together in the last five years. If unfair foreign trade is the cause of the trade deficit, then practically every U.S. trading partner must have decided to start being dramatically more unfair in every product they trade, all at the same time.

These theories can be politely described as implausible, but less polite descriptions may be more fitting.

The problem with these descriptions of America's trade problem is that they consider only imports and exports, and thus consider only half of the modern global economy. Today, nations trade in capital as well as in goods and services.

The fundamental economic lesson is that merchandise and capital flows complement each other; they are two sides of the same coin. Neither one can be considered without the other. Demagogues often mutter darkly that "trade must be a two-way street" but trade is always a two-way street, where some combination of goods and capital is traded for some equal value of goods and capital.

After all, nations don't give most of their products away. By definition, a trade deficit is a situation where the country is both importing more goods than it exports, and simultaneously importing capital to pay for those goods.

The reasons for the dramatic increase in the trade deficit is that America started consuming far more than it produced, and imported both the goods and the capital to pay for them.

Here is the supporting data from the International Monetary Fund: Total demand in the U.S. economy (including government, business and individuals) climbed 5.6 percent per year from 1982 to 1985, but production increased only 4.2 percent per year. By contrast, in Japan during those years, production increased 4.3 percent each year while demand increased 3.1 percent. In Germany, production increased 2.4 percent while demand increased only 1.9 percent.

Business debt and consumer debt have been increasing, but the single biggest sector where America consumes more than it produces is the federal budget. That's why the increase in budget deficits has accompanied the dramatic increase in the trade deficit. Congress and the president have borrowed from abroad to boost consumption; that increased consumption has gone to buy imports, and now the government is complaining that (surprise!) a trade deficit has resulted. By definition, a trade deficit had to result.

America's trade problems are indeed self-inflicted, but not because American businessmen or trade negotiators have been duped by wily foreigners. It's time to put xenophobia aside, and start acknowledging that America's spending and borrowing binge, America's budget deficit, and America's trade deficit are mainly America's own fault.

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