The Washington Post Doesn't Know that the Trade Deficit Is Affected by Imports

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Friday, 12 October 2012 05:13

This is what readers of an article on the U.S. trade situation would conclude. The article notes the large U.S. trade deficit, but then focuses exclusively on the role of increased exports in reducing the deficit. In fact, in order to get the deficit down to a more sustainable level we will almost certainly need both higher exports and lower imports.

Incredibly, the article never once mentioned the value of the dollar. This is by far the most important determinant of both our exports and our trade deficit. If the dollar were to fall by 20 percent against other currencies, as a first approximation it will reduce the price of U.S. exports by 20 percent relative to the price of goods produced elsewhere. All economists agree that lower prices increase demand. It is bizarre that the piece never discusses the over-valuation of the dollar which is the cause of the trade deficit.

The piece was somewhat misleading when it told readers:

"Last year, U.S. exports totaled $2.1 trillion, a 14 percent rise from 2010. That activity accounted for many millions of jobs and about 14 percent of the nation’s economic output."

Exports do not necessarily lead to jobs. For example, if GM moves a car assembly plant from Ohio to Mexico, we are not getting more jobs because part that used to go to Ohio are now exported to Mexico for assembly there. While exports do create jobs, many exports are intermediate goods like the car parts in this story and do not result in additional jobs in the United States.