But isn't the trade deficit a reflection of the inability of our economy to compete and export products the world demands?

The trade deficit measures old industrial-economy strengths more than it measures global competitiveness. We export entertainment, software, music, education, finance, healthcare and innovative technologies like no other economy in the world. One difficulty posed by offering high intellectual property products is that they are easy to copy cheaply: We wonder what the trade deficit would look like if the vast array of pirated movies, music, software, and other technologies had instead been duly purchased. Although many of these exports are not big ticket items, they all represent products with high profit margins. From a global investors' point of view, the profits are more important than the dollar amount of the transaction. For example, author Andy Kessler, author of Running Money, recently noted: "A $300 Intel microprocessor and a $50 Microsoft operating system are exported from the U.S.; a $1000 Toshiba laptop made in Japan is imported, for a net trade deficit of $650.Yet on a profit basis, the U.S. clears 300 bucks, and the rest of the world maybe 50. Which economic system would you invest in?"

As the new knowledgebased/intellectual-capital economy continues to reshape our global economy, so too might it call for a reshaping of how we assign meaning or importance to the trade deficit. The capital markets measure profits, not deficits: as long as the stock and bond markets are strong then we can be sure we are on the right track.

One note of caution however: while the trade deficit in and of itself is not a major concern, the actions taken by trading partners and our government may make it so. Foreign governments are so dependent on exports that they may feel they need to react to a weaker U.S. dollar with some form of trade protection or competitive devaluation. This generally is not good for consumers and may result in higher prices and a slowdown in global trade or economic growth. Most developed foreign countries would do better to stimulate demand and growth in their own economies rather than rely on an export-driven model for success.

« Previous | Overview | Next »