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Part 2: Why is the U.S. trade deficit so large?

Part two of a three-part interview with Professor Masao Suzuki
Interview by Freedom Road Socialist Organization |
April 10, 2018
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This is part two of a three-part interview. Click for part one and part three of this interview.

Fight Back!: In your opinion, what are the main causes of the U.S. trade deficit?

Masao Suzuki: Well, let start with some of the views that are out there. The Trump administration claims that the U.S. is “being taken advantage of” by other countries. But to me, this is just promoting resentment and a victim mentality, when of course the reality is that the U.S. is still the world’s largest economy and military power. The international trade agreements such as the WTO [World Trade Organization] and NAFTA were set up largely by U.S. initiative.

Another view gaining popularity is the so-called “twin deficits” theory. This view holds that the growing U.S. federal government budget deficit, which is large and getting larger with Trump’s tax cuts, means that the U.S. government has to borrow more and more. If the U.S. is not saving enough to feed this borrowing, then it has to borrow from abroad. But where is the rest of the world going to get the dollars to buy U.S. government bonds? By selling more to the U.S. than they buy from the U.S., that is the U.S. trade deficit.

This view is backed by the big increases in both the U.S. government deficits and the U.S. trade deficit in the 1980s under Reagan, and again today under Trump. But a problem with this view is in the 1990s, then-President Clinton and the Democrats in Congress raised taxes and managed to balance the federal government budget. In fact, they managed to bring the budget to a surplus where tax revenues were greater than spending. But the broadest measure of trade, the current account that I spoke of in the first interview, saw the deficit triple in size under Clinton.

Fight Back!: So what do you think?

Suzuki: I think that there are two important factors. One is the state of the U.S. economy. When the economy is booming, as it is today, there are more jobs and income. People buy more, which includes imports, which tend to rise during an economic expansion. As imports rise, so does the trade deficit. The opposite happens during a recession - when the U.S. economy goes into reverse, jobs, incomes and imports all fall, as well as the trade deficit. Look at what happened in 2008 and 2009. In the last months of 2008, the U.S. financial crisis made what was up to then a mild recession into the biggest economic decline since the Great Depression of the 1930s. The U.S. trade deficit went from $695 billion in 2008 to $380 billion in 2009 - a drop of 45% in only one year! Then as the economy came back, so did the trade deficit.

Another thing that is not mentioned much in the mainstream media is the role of U.S., European, Japanese and other multinational corporations. These companies have been offshoring production for years in search of lower costs and greater profits. The single largest type of goods imported to the U.S. from China is cell phones. But these are not cell phones made by Chinese companies such as Huawei, but rather by corporations of other countries, including Apple of the U.S.. The U.S. now imports most of its cars - not including pick-up trucks and SUVs - many from Mexico and Canada. But these are not Mexican or Canadian car companies, rather they are U.S., Japanese and German companies that have set up shop in Mexico or Canada to produce for the U.S. market.

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