Correcting the Trade Deficit

Courtesy Reuters

The principal problem with which the world’s economies must deal during the coming decade is the unsustainable imbalance of international trade. The United States cannot continue to have annual trade deficits of more than $100 billion, financed by an ever-increasing inflow of foreign capital. The U.S. trade deficit will therefore soon have to shrink and, as it does, the other countries of the world will experience a corresponding reduction in their trade surpluses. Indeed, within the next decade the United States will undoubtedly exchange its trade deficit for a trade surplus. The challenge is to achieve this rebalancing of world demand in a way that avoids both a decline in real economic activity and an increase in the rate of inflation.

A rebalancing of world trade is already beginning, due to a sharp decline in the value of the dollar. This decline, under way since early 1985, reflects fundamental economic forces rather than the influence of official jawboning or currency market intervention. The dollar’s value can be expected to continue to fall until it is low enough to achieve the required trade surplus.


The trade deficit of the United States is now so large, and its effect on the American economy so pervasive, that it is easy to lose sight of the fact that in almost every year between the end of World War II and 1981 the United States realized a significant trade surplus. In 1981 U.S. exports of goods and services exceeded imports by more than $14 billion, and the United States had a current-account surplus with which to finance net investments in other countries. But now U.S. trade in goods and services is running a deficit at the rate of about $125 billion a year. The trade deficit in goods alone (i.e., the merchandise trade deficit) has reached an annual rate of more than $160 billion, or more than four percent of U.S. gross national product. The previous capital outflow has been reversed and a foreign capital

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