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Trade Deficits in the Long Run


  • Barry Eichengreen


This paper provides an historical perspective on the recent behavior of the U.S. trade deficit. Judged by U.S. historical experience, the trade deficit has reached what is now unprecedented levels. That unprecedented deficit has its principal source not in changes in market structure affecting the speed with which quantities respond to prices but in the policy environment, namely the monetary-fiscal policy mix. While other industrial countries have run comparable merchandise trade deficits at various points in the past, these countries either financed their deficits out of interest earnings on prior foreign investments or through the large-scale export of services, or used the debt they incurred to finance investment in infra- structure and to expand their capacity to export. Neither of these scenarios has a counterpart in current U.S. experience. How easily can the trade deficit be eliminated if historical experience is a guide? Typically, the rapid reduction of deficits has been achieved through the reduction of imports; this typically entails restraints on aggregate demand from which recession results. Trade deficits have been reduced most quickly and at lowest cost when at least one of two conditions prevails: a favorable shock to the terms of trade or a reallocation of resources toward investment in export-oriented sectors. The first of these conditions is largely beyond the authorities' control, while the second must be initiated well in advance. Barring a fortuitous terms-of-trade shock, this does not give cause for optimism that the conditions are present for rapidly eliminating the U.S. trade deficit at low cost.

Suggested Citation

  • Barry Eichengreen, 1987. "Trade Deficits in the Long Run," NBER Working Papers 2437, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:2437
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    References listed on IDEAS

    1. Eichengreen, Barry, 1988. "Real exchange rate behavior under alternative international monetary regimes : Interwar evidence," European Economic Review, Elsevier, vol. 32(2-3), pages 363-371, March.
    2. Weir, David R., 1986. "The Reliability of Historical Macroeconomic Data for Comparing Cyclical Stability," The Journal of Economic History, Cambridge University Press, vol. 46(2), pages 353-365, June.
    3. Jeffrey Sachs & Charles Wyplosz, 1984. "Real Exchange Rate Effects of Fiscal Policy," NBER Working Papers 1255, National Bureau of Economic Research, Inc.
    4. Carroll, Chris & Summers, Lawrence H., 1987. "Why have private savings rates in the United States and Canada diverged?," Journal of Monetary Economics, Elsevier, vol. 20(2), pages 249-279, September.
    5. Romer, Christina, 1986. "New Estimates of Prewar Gross National Product and Unemployment," The Journal of Economic History, Cambridge University Press, vol. 46(2), pages 341-352, June.
    6. Robert E. Lipsey, 1963. "Price and Quantity Trends in the Foreign Trade of the United States," NBER Books, National Bureau of Economic Research, Inc, number lips63-1, June.
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    Cited by:

    1. CĂ©lestin Monga, 2012. "The Hegelian dialectics of global imbalances," The Journal of Philosophical Economics, Bucharest Academy of Economic Studies, The Journal of Philosophical Economics, vol. 6(1), November.
    2. David H. Howard, 1989. "Implications of the U.S. current account deficit," International Finance Discussion Papers 350, Board of Governors of the Federal Reserve System (U.S.).
    3. Ramon Moreno, 1988. "Saving, investment, and the U.S. external balance," Economic Review, Federal Reserve Bank of San Francisco, issue Fall, pages 3-17.

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