What's Behind The U.S. Trade Deficit?

When the U.S. can purchase goods from the world market simply by issuing debt, it is likely to run persistent trade deficits, they said. Indeed, since the mid-1970s, the U.S. has seen persistent and growing trade deficits.

“[T]he current international monetary system - based on the U.S. dollar as the dominant world reserve currency and U.S. government securities as the most-sought-after store of value - is the root cause of persistent trade deficits in the U.S.," Wen and Reinbold wrote.

Deficits and Manufacturing Employment

The next question the authors addressed is: Do trade deficits lead to a decline in employment in the manufacturing sector? Not necessarily, they explained. The more likely causes are rapid technology growth and improved labor productivity, similar to what happened in the U.S. agricultural sector.

Manufacturing employment in the U.S. started to decline in the 1960s as labor productivity rose. The authors pointed to research by Timothy Kehoe, Kim Ruhl and Joseph Steinberg1 that showed that about 85 percent of the drop in employment in the goods manufacturing sector from 1992 to 2012 was due to the rising labor productivity. Only 15 percent was due to rising U.S. trade deficits.

“When workers get pushed out of agriculture and goods-producing sectors, they enter the service sector," Wen and Reinbold wrote. “This phenomenon of structural change (caused by technology growth) is observed across all successfully industrialized nations."

China’s Role?

Manufacturing employment in the U.S. declined nearly 20 percent from 2000 to 2007, even before the Great Recession, the authors pointed out. They added that this sharp decline correlated with a worsening U.S. trade balance and a growing trade deficit with China.

However, the global comparative advantage in manufacturing has been shifting away from the U.S. since World War II, they noted. Following the war, it shifted to recovering countries such as Germany and Japan. It gradually shifted to the so-called Asian Tigers in the 1970s and 1980s, and then to China.

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Views expressed are not necessarily those of the Federal Reserve Bank of St. Louis or of the Federal Reserve System.

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