NCPA - National Center for Policy Analysis

The Meaningless Trade Deficit

February 14, 2000

Some people are concerned about the growing U.S. trade deficit. Final data for 1999 are not yet available, but it appears that the U.S. ran its largest trade deficit in history -- well over $200 billion.

The trade deficit is essentially a meaningless statistic. This can easily be shown by the fact that no one knows or cares what the trade balance is among the 50 states. As Adam Smith explained more than 200 years ago, "Nothing...can be more absurd than this whole doctrine of the balance of trade."

In an increasingly globalized world, large multinational corporations can provide clients and customers with goods and services from any number of locations. Yet the trade balance data assume that it makes a difference whether goods or services are produced by a U.S. company domestically, or in one of its foreign offices or plants.

Lately, the Department of Commerce has attempted to measure U.S. trade on an ownership basis. It has recomputed U.S. trade data back to 1982, counting the net receipts on sales by U.S.-owned affiliates in foreign countries as part of U.S. exports. It also includes receipts by foreign-owned affiliates here as imports.

The data show that on an ownership basis, the U.S. trade deficit is far smaller than the official figures indicate.

  • For example, in 1997 -- the latest year in the Commerce study -- the U.S. had a deficit on goods and services of $104.7 billion.
  • But adjusting for the $115.8 billion earned by U.S. companies abroad, less the $46.6 billion earned by foreign companies here, lowers that figure to just $35.5 billion.

Large trade deficit figures unfortunately stoke the fires of protectionism and encourage ill-advised policies. Otherwise, they are meaningless.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, February 14, 2000.

 

Browse more articles on Economic Issues