AMERICA'S RECORD TRADE DEFICIT: A Reflection of Economic Strength.

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AMERICA'S RECORD TRADE DEFICIT: A Reflection of Economic Strength.

AMERICA'S chronic trade deficit continues to set records, month after month, year after year, not only for its size, but for its share of an expanding gross domestic product (GDP). The large and growing gap between how much the U.S. imports and how much it exports continues to fuel anxiety among policymakers, economic commentators, and critics of American trade policy. However, those worries rest on a fundamental misunderstanding of the trade deficit's causes and consequences.

Although the U.S. has run a trade deficit every year since 1975, those deficits have reached an unprecedented level as the expansion of the 1990s stretches into a new decade. The U.S. ran a deficit on goods and services of more than $360,000,000,000 in 2000. That is up a third from the then-record deficit of $264,000,000,000 in 1999, and more than double the deficit of 1998.

Trade skeptics, a majority of Americans, and a surprising number of trade journalists believe that a trade deficit of such magnitude can be only bad news. They assume that the deficit imposes a drug on growth and a net loss of jobs, because of either lost export opportunities or rising imports that displace domestic production. During the debate in 2000 over granting permanent normal trade relations to China, for example, opponents p...

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