Recently, the Commerce Department announced that the U.S. merchandise trade deficit narrowed to a seasonally adjusted $32.78 billion in the fourth quarter on a balance-of-payments basis from a revised $35.97 billion in the third quarter. Despite this news, many policymakers see the U.S. trade deficit as a symptom that the country has lost its edge in international competition. They believe that foreign competitors are able to take markets away from U.S. producers because they have some important advantages. In particular, they have lower wages, superior technology, and "unfair" trade practices.
A similar scenario in the Reagan years created a rise in protectionism, and some worry about history repeating itself. According to Harold B. Malmgren, a Washington, D.C. economist, as the trade deficit increases, the United States might embark on a vigorous program of unilateral actions and threats of action to force other governments to adjust.
Many analysts do not believe the trade deficit is due to lower wages, superior technology, and "unfair" trade practices. On the contrary, they think the trade deficit is due to certain macroeconomic fundamentals, such as the U.S. government budget deficit and the country's investment and savings patterns. Furthermore, they think that the trade deficit is not necessarily the best way to judge U.S. competitiveness. More important factors to consider would be price competitiveness and productivity.
According to this viewpoint, it is a mistake to focus on the most recent numbers. The reason for this is that the source of the problem is more cyclical than it is structural. The U.S. has been in recovery for a while, but many of its industrial trading partners are still in recession. So the U.S. trade deficit is largely due to the fact that, as the U.S. continues to grow and import more, the weakness abroad is hurting its exports.
Although the trade deficit has persisted for ove...