In today’s Wall Street Journal, Phil Gramm and I bust some myths about so-called “trade deficits.” Two slices:
Trade deficits don’t stifle growth, nor do trade surpluses foster it. In the 29 years after the end of World War II, during which the U.S. had a virtual monopoly in heavy manufacturing and regularly ran trade surpluses, real per capita gross domestic product grew 2.1% a year. Over the next 29 years, from 1976 through 2004, the U.S. ran chronic trade deficits, and the average annual growth rate of real per capita GDP was virtually identical: 2.2%.
During the Reagan administration, as economic growth surged, foreign investment flooded into the country and the trade deficit soared. The trade deficit similarly grew during the economic boom of the Clinton administration. In the high-growth years from 1998 to 2001, when the federal government ran a budget surplus, the annual trade deficit more than doubled. And when economic growth ramped up in 2017 and 2018 due to Mr. Trump’s deregulation and tax cuts, foreign investment surged and the trade deficit rose—despite Mr. Trump’s 2018 tariffs.
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Has the expansion of global trade “hollowed out” U.S. manufacturing, as Joe Biden claimed in 2022? No. U.S. industrial production today is more than double what it was in 1975, the last time we ran a trade surplus. It’s 55% higher than in 1994, when the North American Free Trade Agreement went into effect, and it’s 18% higher than it was when China joined the World Trade Organization in 2001. Real wages are up 19% from 1994 and 10% from 2001. The inflation-adjusted value of America’s capital stock is 36% higher today than it was in 2001, 66% higher than it was in 1994, and 178% higher than it was in 1975.
Manufacturing as a share of total nonfarm employment peaked during World War II and has declined ever since, following the pattern of employment in agriculture, which fell from 40% of the labor force to 2% over the course of the 20th century. This is attributable not to globalization, but to the spread of modern technology and the rise in demand for services relative to goods. Neither Nafta nor China’s membership in the WTO notably increased the secular rate of decline in the share of workers employed in manufacturing.
