Some Observations About International Trade and Global Interdependencies

One of the consequences of slow economic growth in the troubled countries of Asia combined with a relatively robust economy at home is that the U.S. trade deficit has widened significantly. In the second quarter of 1998 the National Income and Product Accounts measure of real net exports was -$252.9 billion dollars — the largest ever recorded. Even as a share of GDP, real imports exceeded real exports by almost 3.4% of GDP which is only rivaled by the 3.2% share in the third quarter of 1986 (see Figure 1). This has once again raised concerns among policymakers, journalist and business people who predict dire consequences and campaign to protect U.S. markets from "cheap foreign goods." This brief discussion is intended to make several simple but important points. First, trade deficits can be good or bad depending on the underlying fundamentals of the economy. Moreover, the causes of trade imbalances are best viewed as reflecting domestic choices rather than as an externally imposed outcome. Second, the current trade imbalance of the U.S. and other robust economies is a healthy stimulus for the ailing economies in parts of Asia. Third, despite the rhetoric surrounding the global economy and its interdependencies, the U.S., as a whole, has a limited exposure to the struggling economies of Asia or Russia