- The Washington Times - Wednesday, February 23, 2000

According to the Commerce Department, the trade deficit reached a record $271.3 billion last year. Not only was this an all-time high, it was 65 percent higher than the previous record of $164.1 billion, set last year. On a country-by-country basis, the United States had record trade deficits with Japan, China, Canada, Mexico and the European Union.

Yet contrary to some press reports and the reaction of some politicians, these new statistics are not bad news. Indeed, if nothing else, they tell us that the U.S. economy is prospering.

We have a trade deficit for two reasons, and both are signs of strength. First, the United States is enjoying faster economic growth than most of its trading partners. This means American consumers and businesses have more income to purchase goods and services, whether produced here or overseas. Most foreigners, by contrast, are experiencing more sluggish growth and therefore do not have as much purchasing power.

Indeed, if protectionists truly are upset about the trade deficit, they should hope for a recession. The last time the United States had a trade surplus, for instance, was nearly 20 years ago when incomes were falling and the economy was trying to overcome the policies of the Carter administration. The United States also had trade surpluses during the Great Depression, when high unemployment meant a dramatic reduction in all economic activity, including purchases of imports.

Rather than using the trade deficit as an excuse to tilt the playing field with higher taxes on imported goods, policy-makers should encourage other nations to adopt pro-growth policies. Japan and most European nations have tax rates of more than 50 percent and desperately need across-the-board reductions. The burden of government spending is far too large in these nations, and regulatory control of both labor and industry is distorting economic choices.

If these other nations were to adopt U.S.-style free market policies and reduce their bloated state sectors, their unemployment rates would fall, economic growth would jump and consumers would have higher incomes. With those higher incomes, they would be able to afford more goods and services, including those produced in the United States.

The second reason that a trade deficit is good news is because it means more investment in the United States. How so? When foreigners get dollars by selling us products, they can use the money to buy American goods and services or they can invest the money in the United States (they can exchange the dollars for other currencies, but the new holder of the dollars will face the same choice). A trade deficit, therefore, is simply a measure of the degree to which foreigners are choosing to invest their dollars in the United States. In other words, the flip side of a trade deficit is a capital surplus.

This is a remarkable referendum on the U.S. economy. People overseas clearly believe that the best place to invest wealth is in our country. Indeed, foreign investment has skyrocketed since the early 1980s (foreign political elites may have sneered at Reaganomics, but foreign investors were delighted to find a country where policy-makers realized that wealth creation was something to be encouraged rather than punished).

Investing in the United States is good for foreigners because they can earn profits, but it also is good for Americans. This capital surplus, after all, helps explain why U.S. output is expanding and unemployment is on the verge of falling below 4 percent. In effect, we are enjoying a repeat of the late 1800s, when European investors helped finance railroads, canals, factories and other aspects of our industrial revolution.

Actually, there is a third reason why a trade deficit is a good thing, but it has to do with politics rather than economics. More specifically, the data clearly show that protectionist arguments are false. For decades, opponents of trade argued that deficits meant fewer jobs. Yet the U.S. unemployment rate is less than half the unemployment rate of many of our trading partners, most of whom have higher trade barriers than the United States. And who can forget the "twin towers" fallacy, the silly notion pushed by the left in the 1980s that budget deficits and trade deficits were interrelated.

While protectionists have lost the argument, this does not mean the forces of freedom are winning. The Clinton administration completely mishandled the recent trade talks in Seattle, thus undermining a chance to expand world commerce. Moreover, the administration's capitulation to the Luddite left has re-energized protectionists around the world.

Policy-makers have an obligation to sell the benefits of free trade vigorously. The current administration started well, allowing NAFTA and GATT reform to become law. These big tax cuts on trade help explain why our economy is prospering. Ever since, though, the president has dropped the ball. With any luck, the next president will not let politics interfere with doing the right thing for the economy.

Daniel J. Mitchell is the McKenna senior fellow in political economy at the Heritage Foundation.

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