Is the U.S. Trade Deficit Sustainable?

by Mann, Catherine L.

• ISBN13: 9780881322644
• ISBN10: 0881322644
• Format: Paperback
• Copyright: 1999-11-01
• Publisher: Peterson Inst for Intl Economics

Summary

The United States trade deficit has hit record levels and continues to rise. Is a chronic and widening deficit sustainable or will the dollar crash, perhaps taking the economy with it? If the problem was one of "twin deficits", why has the external deficit continued to worsen even as the budget deficit narrowed to zero? If US companies are so intensely competitive, why does the external deficit persist? Does the external deficit represent protectionism abroad; will it lead to protectionism at home? This study seeks to answer these perennial questions about the trade deficit. Each chapter presents simple analytical frameworks as a basis for concise, succinct, and clear statements on each major issue. The last section of the book provides an outlook for the deficit and suggests alternative policy courses for dealing with it.Is the U.S. Trade Deficit Sustainable? is designed for the policymaker and general public who are interested in the US role in the world economy, but who need not be experts in economics. It is also suited for courses in international economics, business, and international affairs.

Author Biography

Catherine L. Mann, Senior Fellow, held several posts at the Federal Reserve Board of Governors (1984-87 and 1989-97), including Assistant Director and Special Assistant to the Staff Director, International Finance Division (1994-97). She was a Senior Economist on the Staff of the President's Council of Economic Advisers (1991-92), the principal staff member for the Chief Economists of the World Bank (1988-89), and a Ford Foundation Fellow at the National Bureau of Economic Research (1987). She is an Adjunct Professor at the Owen School of Management at Vanderbilt University and has also taught at the University of Chicago, Princeton University, University of Maryland, Georgetown University, Boston College, and Massachusetts Institute of Technology.

Table of Contents

Preface	xi
Acknowledgments	xv
Introduction	1	(12)
1980s Redux?	1	(1)
The US Economy in the 1990s: Robust Domestic Growth and Rapid Global Integration	2	(2)
Global Financial Crises Highlight the Linkages	4	(1)
Where To from Here? An Ever-Widening Trade Deficit?	4	(2)
Overview and Organization of the Book	6	(1)
Conclusions and Policy Recommendations	7	(6)
I What Forces Drive International Trade, Finance, and the External Deficit?
Whatever Happened to the ``Twin Deficits''?	13	(16)
Why Were the Two Deficits Thought to Be Twins?	15	(3)
What Happened to Separate the Twins?	18	(5)
Conclusion	23	(2)
Addendum: The NIPA Statistical Discrepancy	25	(4)
Has US Comparative Advantage Changed? Does This Affect Sustainability?	29	(18)
Why Trade?	29	(1)
Where Does Comparative Advantage Come From?	30	(1)
``Two-Way'' Trade in Similar Products Is the Largest Component of US Trade	31	(1)
What Do We Trade and How Has It Changed over Time?	32	(5)
Rising Services Trade and Implications for Sustainability	37	(2)
Globalization of Production Is Essential for Comparative Advantage in Some Products	39	(2)
Two-Way Trade in Financial Assets Reveals US Comparative Advantage	41	(2)
Conclusion	43	(4)
II How Does Increasing Integration into the Global Economy Affect Sustainability?
How Does Trade Affect the American Worker?	47	(14)
The Trade Deficit and Labor Market Dynamics	48	(2)
Change over Time in US Exposure to Trade	50	(2)
A Model of Global Exposure and Worker Wages	52	(3)
A Model of Labor Skills and Institutions, International Trade, and Wages	55	(2)
Trade and Technology Go Hand in Hand	57	(2)
Conclusion	59	(2)
What Role for Trade in the ``New Paradigm'' of Sustainable Long-Run Growth?	61	(16)
The Trade-Off between Inflation and Unemployment	62	(3)
New Investment and the Inflation-Output Trade-Off	65	(1)
International Forces and the Inflation-Output Trade-Off	66	(2)
Globalization and Trend Productivity Growth	68	(4)
Conclusion	72	(5)
III How Do Competitiveness and Trade Policy Affect Sustainability?
Is the External Deficit Caused by Unfair Trade Practices?	77	(18)
Sources of Bilateral Deficits	78	(3)
Characteristics of US Bilateral Deficits	81	(3)
Bilateral Trade Negotiations, Bilateral Deficits, the Overall US Deficit, and the Question of Sustainability	84	(4)
Multilateral Service-Sector Negotiations, the Overall US Trade Deficit, and the Question of Sustainability	88	(1)
Trade Deficits and US Trade Policy Reaction	89	(3)
Conclusion	92	(3)
Is There a Good Measure of Competitiveness?	95	(20)
Determinants of Relative Prices and Implications for Competitiveness	96	(3)
The Key Role of Labor Costs and Quality	99	(4)
Linking Relative Price Competitiveness to the Trade Balance	103	(2)
Terms of Trade, Purchasing Power, and Competitiveness	105	(1)
Competitiveness through Globalization: The Ownership-Based Supplement	106	(3)
The Underpinnings of Long-Term Competitiveness	109	(3)
Conclusion	112	(3)
IV Are the Imbalances Sustainable?
Is the United States ``Living beyond Its Means'' or an ``Oasis of Prosperity''?	115	(18)
Income and Relative Prices Affect Trade Flows	117	(2)
Business Cycles and External Balance	119	(2)
Impact of Financial Turmoil on US External Balances	121	(2)
The Puzzling ``Income Asymmetry''	123	(3)
Private Savings and the Components of Trade	126	(3)
Conclusion	129	(4)
Do International Capital Markets Determine a Country's Trade Balance?	133	(16)
Trade, Finance, and External Crises: Common Features from the Gold Standard, to Bretton Woods, to the 1990s	134	(2)
Changes in the 1990s: Flexible Exchange Rates and Computer Technology Enhance Capital Flows	136	(5)
An Illustration: Transmitting the Asian Financial Crises to US Capital Markets	141	(3)
Differences in Response and Adjustment: The J-Curve and Financial Market Overshooting	144	(1)
The Financial Turmoil of the 1990s: A Preview for the United States?	145	(3)
Conclusion	148	(1)
Is the US External Deficit Sustainable?	149	(26)
The Concept of Sustainability	151	(5)
Empirical Criteria and Evidence of Sustainability for Industrial Countries	156	(1)
Applying the Analytical Framework and Empirical Benchmarks to US Data	157	(10)
Ways to Achieve Sustainability	167	(6)
Conclusion	173	(2)
References	175	(6)
Index	181