Economic Snapshot | Trade and Globalization

Manufacturing key to reducing trade deficit

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Snapshot for January 31, 2001.

Manufacturing key to reducing trade deficit
The broadest and most complete measure of U.S. trade and income flows is the current account, which includes trade in goods, services, investment income, and net foreign payments by the U.S. government. Manufacturing has been responsible for most of the trade deficit for the past two decades (as shown in last week’s Snapshot). The U.S. deficit in manufacturing has also followed the same pattern as the U.S. current account deficit very closely since 1967 (as shown in the figure below). In fact, during that time, the manufacturing deficit almost equaled the current account deficit, as demonstrated by the overlapping trends in this figure. Therefore, if the United States is going to reduce or eliminate its current account deficit, the manufacturing sector will be the focus for such improvement. If the trade deficit is to be eliminated, manufacturing industries will have to increase their output of exports and import-competing goods by at least 4.3% of gross domestic product (GDP), and probably by much more. This will require at least a 30% increase in U.S. manufacturing output. 1

Current account and manufacturing trade balance as a share of GDP, 1967 - 2000:Q3

Data Source: U.S. Department of Commerce, Bureau of Economic Analysis, National Income and Product Accounts (quarterly), and analysis by Wynne Godley of the Levy Institute. Also, see the final report of the U.S. Trade Deficit Review Commission, Chapter 3 — Democratic Commissioners Viewpoint [PDF] from The U.S. Trade Deficit: Causes, Consequences, and Recommendations for Action.

1. Manufacturing employment was 14.3% of total U.S. employment in 1999 (U.S. Bureau of Labor Statistics Data, Most Requested Series: home page: If production of manufactures were to increase by an amount equal to 4.3 percentage points of GDP, then employment in this sector would have to increase by more than 29%. However, the current account deficit is likely to expand significantly as a share of GDP before it begins to decline, so the required increase in employment and output could be even larger.

This week’s Snapshot by EPI economist Robert E. Scott.

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