Friday, February 17, 2006

The Trade Deficit and Its Root Causes

According to the Bureau of Economic Analysis, the latest trade numbers boosted the deficit another $65.7 billion to a total of $725.8 billion. Our strong service sector had a trade surplus of $56.3 billion, but the export of goods trailed imports by $782.1 billion. Using the total trade deficit, I was able to calculate that 60% of the entire deficit is due to a $433.7 billion deficit in automobiles and consumer goods. These two end-use categories are one-third of the six categories listed and together account for 38.6% of total imports and 23.9% of exports.

I conclude that the trade deficit will be long-standing and will not slow for quite some time. American-made vehicles are beginning to lose market share at home and have never fared well against foreign competitors. However, is this deficit even such a bad thing? What we are losing in the trade deficit is being negated by Net Foreign Investment thanks to Chinese buy-up of U.S. bonds, among other things. The worst thing that can be done is the blocking of free trade by protectionist legislators like Chuck (Smoot) Schumer and Lindsey (Hawley) Graham (Smoot-Hawley tariff of 1930 threw us deeper into the despair of the Great Depression by cutting off foreign investment and halting imports dead in their tracks) -- (nicknames c/o Larry Kudlow).

Free trade and continued foreign investment will make the trade deficit a non-issue. Protectionism will make the deficit a problem and once we start down that road, it'll be hard to find our way out of the woods ...

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