THE WRONG SCORECARD
Every U.S. president over the past quarter-century has confronted an annual trade deficit. But the cavernous trade gap inherited by President George W. Bush dwarfs those faced by his predecessors. America's current-account deficit (which measures the cross-border exchange of goods, services, and investment income) averaged more than $1 billion a day last year, reaching a record 4.4 percent of GDP. Many economists worry that the huge trade deficit, which must be financed by foreign investors, could lead to a full-blown financial crisis if and when those investors become unwilling to fund the imbalance. Something as benign as stronger economic growth in another country, for instance, could attract a larger share of the world's savings, leading to higher U.S. interest rates, a weaker dollar, and a grimmer economic outlook for the United States and the world.
Economists offer various explanations for the persistent U.S. trade deficit. Some argue that America buys more from the world than it sells because its companies are growing less competitive. Others blame the "unfair" trade restrictions and labor policies of other countries. Still others point to the underlying strength of the dollar, which makes American goods and services more expensive for foreign buyers.
Whatever the proper explanation, a simple and important fact is absent from the debate: the trade balance is no longer a valid scorecard for America's global sales and competitiveness. Given a choice, U.S. firms prefer to sell goods and services abroad through their foreign affiliates instead of exporting them from the United States. In 1998, U.S. foreign-affiliate sales topped a staggering $2.4 trillion, while U.S. exports -- the common but spurious yardstick of U.S. global sales -- totaled just $933 billion, or less than 40 percent of affiliate sales. How U.S. firms compete in world markets, in other words, goes well beyond trade.
Still, trade erroneously remains the standard benchmark of global competitiveness. More worrisome, it is the most important factor shaping U.S. international economic policy. Overblown concern