Trade Deficits in the Long Run

Abstract

Among policymakers, the U.S. trade deficit is increasingly viewed as the problem that will not go away. In 1986 the deficit reached unprecedented levels in excess of $140 billion. The trade gap has widened in nominal terms in every calender year since 1980. While the deficit’s growth over the early part of the decade could be straightforwardly attributed to the rise of the dollar and to the consequent decline in the relative price of U.S. imports and the rising cost to foreigners of U.S. exports, the persistence of deficits in the face of the dollar’s subsequent decline has sent shudders through Washington, D.C. conference rooms and corporate boardrooms alike. Even those who anticipate that import and export quantities will eventually respond to the dollar’s real depreciation entertain the possibility that the competitiveness of exporting and import-competing firms has been damaged permanently by the deficits experienced in the interim.

Prepared for the St. Louis Federal Reserve Bank Conference on the U.S. Trade Deficit. Much of the work on this paper was completed during a visit to the Department of Economics of Tel Aviv University, whose hospitality is acknowledged with thanks. Trevor Dick and Taka Ito provided valuable advice on Canadian and Japanese data. Anna Schwartz provided helpful comments in her role as conference discussant.