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Trade-Deficit Trash Talk
The gloom and doom is all hogwash.


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Larry Kudlow

For all the hullabaloo about the widening trade deficit, no one talks about the spectacular performance of U.S. exports. This is a key recovery indicator, and it’s booming.

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Two years ago U.S. exports were falling by nearly 15 percent, a recessionary sign. For the twelve months ending in March, however, total exports of goods and services increased by 14.6 percent. This turnaround, forged in rapid technology gains and record productivity, shows the world-class competitiveness of American workers and businesses.

The recent decline in the exchange value of the dollar from the astronomical overshoot of a few years ago has also helped. So has the pickup of business investment funding that followed the Bush tax cuts of 2003. The U.S. export picture is rosy indeed.

Pessimistic pundits go berserk every time trade-deficit numbers are published. But their gloom and doom is hogwash. The U.S. has run a sizable trade gap for nearly 25 years, even while the economy has prospered mightily, total job creation has increased significantly, and interest rates and inflation have generally trended lower.

Sifting through reports on the $46 billion trade gap for March, it’s clear that the domestic and international media (particularly in Old Europe) is obsessed with blaming U.S. imports for the world’s economic ills. We profligate Americans consume too much, they say. We live too well. Blame America.

Nonsense.

Yes, imports exceeded exports in March. So what? This is not over-consumption by individuals. U.S. imports of industrial supplies and capital goods that fuel business expansion and job creation at home rose 10.5 percent and 16.5 percent respectively over the past year. Meanwhile imports of consumer goods increased 10.6 percent. This is a good balance. It’s also the single biggest stimulus to many foreign economies, especially Europe’s.

The U.S. has a very open and relatively low-tariff trading policy that enables businesses and consumers to purchase high-quality goods at the lowest prices worldwide. This enhances our living standards and prosperity. Just ask the 135 million Wal-Mart customers who shop at the local store or online. They’re on a worldwide shopping tour that never leaves the neighborhood.

Interestingly, when measured on a twelve-month basis, total exports are actually growing slightly faster (11.8 percent) than total imports (11.3 percent). And while we’re buying consumer-type goods and services at a 10.6 percent clip, we’re actually selling consumer goods abroad at a 17.4 percent rate. More, while we’re purchasing business investment goods at a 16.5 percent pace, we’re selling our homemade business products at an 18.4 percent rate.

All this reflects the health of the American economy. During the early ’80s and again in the early ’90s the U.S. briefly ran trade surpluses. But those were recessionary periods. Imports collapsed along with the economy.

Why then do so many insist on a trade surplus?

Here’s a simple solution to our “trade gap”: Run a scorched-earth monetary implosion to jack-up interest rates and shrink liquidity, then raise personal and business tax rates. This root-canal economic policy will terminate the economic recovery. But it will probably bring on a trade surplus. Is this what people want?

Here’s a better tune, which is playing right now: Pro-growth tax reforms, deregulation, flexible labor markets, and free-trade policies have worked to grow the U.S. economy much faster than the economies of Europe or Japan. So we buy more from them than they buy from us. Again, so what?

Balancing our trade gap, indeed propelling our growth-driven trade deficit, is a steady flow of foreign capital into our high-return economy. Last year, net private capital inflows were $370 billion. The actual current account deficit for goods and services is $490 billion. The difference is a statistical discrepancy, one that likely reflects government undercounting of small-business exports.

One other important point. Our biggest export customer, in terms of growth, is China. Over the past twelve months U.S.-China sales have expanded at a 39.1 percent rate. That’s bigger than what we sell to Mexico (23.9 percent), Japan (15.2 percent), or Western Europe (12.7 percent). We may be running a trade deficit with China, but we’re also tapping into that vast new market at a very rapid rate. It’s this expanding export market that will open the door to millions of new jobs in America.

U.S. Treasury Secretary John Snow has been exhorting our global trade partners to adopt strong pro-growth policies of lower tax rates, monetary expansion, and trade liberalization. This is the best way to narrow the U.S. trade gap and expand the global economic pie at the same time. Making our export customers stronger makes us stronger.

The international trade game must never be zero-sum, where one nation benefits at the expense of another. Instead, global trade and world economic growth should be a win-win for all the nations involved.

— Larry Kudlow, NRO’s Economics Editor, is CEO of Kudlow & Co. and host with Jim Cramer of CNBC’s Kudlow & Cramer.



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