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Manufacturing and Trade Balances: A Response from Rob Atkinson

The dominant view in Washington, especially among conventional neo-classical economists, is that trade deficits don’t matter and they are caused by lack of national savings. This is a reassuring view to free-market believers because it means that the government doesn’t have to pick winners: in this case export-based manufacturing. If the trade deficit is not a problem, then there is no need for an industrial policy. And for them an industrial policy is anathema because it substitutes the wisdom of the state for the wisdom of the market; violating freedom in the process.

But as Rob Atkinson writes in International Economic Law and Policy Blog in response to a piece from Simon Lester, the massive U.S. trade deficit is a problem for two reasons. First the annualized accumulation of trade deficits means a massive trade debt that has to be paid back in the future by running trade surpluses. At some point, other nations will demand to be paid in goods and services, not ones and zeros (e.g., money). As such, it imposes generational unfairness because the future generation will have to consume less than they produce.

Second, the U.S. trade deficit reflects a loss of competitiveness in key industries. If you believe that potato chips, computer chips, what’s the difference, there’s nothing I can say to convince you that some indsutries are more key than others. Simon Lester appears to believe this when he says “the particular focus of a country’s economy on one sector or another is not a key long-term factor in determining the trade balance.”

Read the full commentary.

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