The American Trade Deficit in Perspective

In recent years, the strong American recovery in overall production and employment has been accompanied by further deterioration in the merchandise trade of the United States with other countries. The reasons for focusing on American merchandise trade are not merely parochial; it is important for Europeans and others to understand that this poor trade performance of the United States reflects a disequilibrium in the world economy as well as in the American domestic economy. Political strains in many countries have been the inevitable result. The promises made at last year's Williamsburg Summit with regard to international trade and finance have not been fulfilled. If anything, international tensions arising from economic issues have increased during the past year.

Let me begin by reviewing some essential facts about the foreign trade of the United States. Until 1970, the United States enjoyed a surplus in its merchandise trade with the rest of the world. Since then, with oil prices higher and competition from its trading partners keener, trade deficits have been the rule. For a time this served a constructive international role in view of America's surplus on other items in its international accounts. But the trade deficit took a quantum jump toward the end of the 1970s when it reached a rate of about $30 billion per year-a rate that was maintained through the first half of 1982. More recently, the trade deficit has grown by leaps and bounds. The annual rate was $75 billion in the final quarter of 1983, and it is expected to exceed $100 billion during the 1984 calendar year.

To be sure, the deterioration in America's merchandise trade is still being offset to some degree by its traditional surplus on trade in services and on investment income from abroad. Even so, the deficit in the U.S. international current account-which includes the latter items-reached over $40 billion during 1983, and ran at a much higher annual rate in its final quarter. The counterpart of this dramatic current account deficit has been a huge flow of funds from abroad to the United States combined with a sharp contraction in its traditional capital exports. That is hardly a welcome development for a nation with the largest and richest economy in the world.

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