Question

Drawing upon Griswold's arguments, discuss the validity of the following propositions and fully explain your reasoning:

a) The U.S. deficit in trade of goods and services is an important indicator of declining U.S. competitiveness in the world;

b) The single biggest factor explaining growing U.S. trade deficits is the unfair trade policies of China, Japan and Germany;

America’s Misunderstood Trade Deficit

Myth: “America Is Losing Its Competitiveness”
The “competitiveness” myth has gone into remission in recent years. Since the Cuomo Commission report, the United States has enjoyed seven consecutive years of healthy, noninflationary growth along with historically large and rising trade deficits. Meanwhile, Japan and Germany, the two export-driven juggernauts that were supposed to eclipse the United States as economic powers in the 1990s, have struggled with slow growth and rising unemployment.

America’s experience in both the 1980s and the 1990s refutes any connection between trade deficits and a loss of industrial might. Industrial production in the United States has climbed steadily in the past two decades during a time of historically large U.S. trade deficits.
Between 1980 and 1987, when the U.S. current account deficit was rising to a peak of 3.6 percent of GDP, U.S. industrial production rose by 17 percent and total manufacturing output by 23 percent. The same story has repeated itself in the 1990s. Between 1992 and 1997 the annual U.S. trade deficit almost tripled, from $39 billion to $114 billion. Meanwhile, since 1992 total industrial production in the United States has surged by 24 percent and manufacturing production by 27 percent. In Japan during the same period, industrial production has grown by only 8 percent, and in Germany growth has been less than 1 percent. America runs substantial bilateral trade deficits with both countries.
America is the world’s number-one trading nation in both imports and exports. Between 1992 and 1997, U.S. exports of goods and services surged from $617 billion to $932 billion. The reason the trade deficit has grown is that imports have increased even faster, from $657 billion to $1,046

billion. By any definition, the ability of American industry to compete in the world has not suffered because of a rising trade deficit. The experience of the 1980s and 1990s points in quite the opposite direction.

Enduring Myths about the Trade Deficit
Misunderstanding of the U.S. trade deficit has spawned a number of myths about international trade and America’s place in the global economy. Those myths have allowed trade deficits to be used to further a number of anti-trade and anti-market positions, including export subsidies, industrial policy, and sanctions against “unfair” trading partners. The following are among the most common and harmful myths surrounding the trade deficit.Myth: “Unfair Trade Barriers Cause Trade Deficits”
Many Americans are convinced that a bilateral trade deficit proves that the foreign country’s market is relatively closed to U.S. exports compared with the “open” U.S. market. America’s large bilateral deficit with Japan is almost unanimously seen as a problem by U.S. policymakers who share

that view, with blame for the deficits placed squarely on “unfair” foreign trade barriers.
A survey of America’s major trading partners challenges that assumption. Countries with which the United States runs large deficits are not characteristically more protectionist toward U.S. exports than are those with which we run a surplus. Canada and Mexico, two countries that are very open to U.S. exports thanks in part to NAFTA, are both among the five countries with which the United States has the largest bilateral trade deficits. On the other side, America’s third largest bilateral trade surplus is with Brazil, a country whose barriers to imports remain relatively high. Americans face a common external tariff when exporting to members of the European Union, yet some EU members (the Netherlands and Belgium) are among the top surplus trade partners, and others (Germany and Italy) are among the top deficit partners. Trade policy cannot explain those differences.

Blaming bilateral deficits exclusively on differences in trade policy once again misses the reality of investment flows. In Japan, high domestic savings rates provide a pool of capital that far exceeds domestic investment opportunities. Japan “exports” capital to the United States, which allows Americans to import more goods from Japan than we export. The main reason that America’s bilateral trade deficit with Japan exploded in the 1980s is that the Japanese government lifted many of its capital controls with the passage of the Foreign Exchange and Foreign Trade Control Law in December 1980. That allowed a tsunami of Japanese savings to flow across the Pacific to the United States, where it could draw a more favorable rate of return.

Answer 1

Solution A

Trade deficit with respect to USA has largely been caused due to trade barriers from countries like Japan andBrazil as well as rising protectionism policies. Also with low industrial production and tight capital norms exports havebeen difficult and so does comparative advantage takes hit causing trade deficit And hence US Trade looks uncompetitive.

Solution B

It is true that rising trade barriers, protectionist policies and devaluation of goods byChina has caused surge in exports from lther countries and manifold increase into US. This has caused deficit to widen more and more. However the single biggest factot is simply not the trade barriersbut also various other reasons.