Balance of Trade

BALANCE OF TRADE

BALANCE OF TRADE. Trade balances are the financial flows that arise from trade in goods and services and unilateral transfers between countries. These financial flows constitute a portion of a country's current account. The balance of trade is measured by the dollar value of payments and receipts for goods and services.

Overview

From 1815 to 1934, U.S. governments generally enacted policies that limited imports of manufactured goods, in the interest of protecting domestic producers. Trade balances were generally negative until the United States emerged as an industrial power in the 1870s. Notwithstanding the improving competitive position of U.S. manufacturers, reflected in surging trade surpluses, high tariffs remained in place until the Smoot-Hawley tariff of 1930 brought protectionism into disrepute.

The administration of President Franklin D. Roosevelt adopted a freer trade position with the passage of the Reciprocal Trade Agreements Act in 1934. In the context of growing surpluses in the trade of merchandise goods, the United States played a leading role in liberalizing trade after World War II (1939–1945). Persistent and growing trade deficits from the 1970s on prompted successive administrations in Washington to pursue "strategic" trade policies that retreated selectively from the free trade position of the early postwar period. Despite the concessions to so-called fair trade, U.S. governments remained biased toward freer trade, despite the large and growing trade deficits of the 1980s and 1990s.

Economists generally frown on the idea that trade surpluses are better than deficits and believe that policies that suppress imports invariably reduce exports in the long run. With the growth of the trade deficit, concern over jobs and the means to service trade balances have prompted calls for policy changes that redress the imbalance among exports and imports. At the end of the twentieth century, however, public policy expressed little concern regarding the trade deficit.

From Colonialism to World War I

The thirteen American colonies ran persistent trade deficits with Great Britain from 1721 to 1772. Surpluses with other countries reduced the overall deficit somewhat. Yet from 1768 to 1772, colonial exports totaled £2.8 million, while imports equaled £3.9 million. There were significant regional differences. As of 1770, for instance, Georgia, Maryland, Virginia, and the Carolinas maintained a roughly even trade balance with Britain on the strength of staple crop exports. At the same time, the Mid-Atlantic and New England colonies ran significant deficits. They serviced them with earnings from shipping and other mercantile services, in which New York and Philadelphia excelled, and exports of primary and semi-processed products.

The new American nation maintained imports of British manufactured goods. American producers benefited from the Napoleonic Wars (1803–1815); in 1807, they were exporting three times more goods than they had exported in 1793. From 1807 to 1830, British protectionism and a growing U.S. economy produced growing trade deficits, as manufacturing imports soared, while Britain kept its markets closed to U.S. finished goods. However, British demand for cotton soared during the mid-nineteenth century, and exports of the staple crop constituted half of America's total exports in the two decades prior to the Civil War (1861–1865). From 1791 to 1850, America's merchandise trade balance was in a deficit for all but eight years. At the same time, the volume of U.S. exports increased more than sevenfold, from $19 million in 1791 to $152 million in 1850. When services are included, the trade balance was in surplus for nineteen of the sixty years between 1791 and 1850.

From 1850 through the end of World War I (1914–1918), America's trade balance moved from slightly unfavorable to enormously favorable, reflecting the nation's emergence as a world economic power and the continuation of trade protectionism. Thus, from 1850 to 1873, the merchandise trade deficit totaled $400 million, as exports grew from $152 million to $524 million. From 1874 to 1895, the trade balance turned favorable on the strength of agricultural exports and increases in shipments of manufactured goods. Volume increased steadily as well, with exports of goods and services reaching $1 billion for the first time in 1891. From 1896 to 1914, the trade balance was markedly favorable, as U.S. manufacturers competed globally for markets. Indeed, the merchandise trade balance was some $9 billion in surplus for this period. Purchases of services reduced the overall trade surplus to $6.8 billion. Spurred by the European demand for U.S. goods and services during World War I, the U.S. trade surplus soared from 1915 to 1919. Net goods and services totaled $14.3 billion for the five-year period, with exports topping $10.7 billion in 1919—an amount that was not exceeded until World War II (1939–1945). Not incidentally, America also became a creditor on its current account for the first time, on the strength of lending to wartime allies Britain and France.

From World War II to the Twenty-First Century

During the interwar period, the U.S. trade balance was consistently in surplus on greatly reduced volumes of trade, even as the merchandise trade balance turned negative from 1934 to 1940. As was the case during World War I, U.S. exports soared during World War II, peaking at $21.4 billion in 1944. Much of this volume was owed to the lend-lease program. As a result, America enjoyed an enormously favorable balance of trade, which it sustained during the early postwar period, from 1945 to 1960.

The favorable trade position of the United States at the end of World War II, underpinned by the relative strength of its manufacturing sector, contributed to the willingness of U.S. administrations to liberalize the global trading regime through the General Agreement on Tariffs and Trade and its successor, the World Trade Organization. Both Democratic and Republican administrations remained committed to a freer trade policy stance—de-spite many exceptions, most notably steel, autos, and semiconductor chips—even as the U.S. merchandise trade balance disappeared in the late 1960s and then turned negative in the context of growing competitiveness on the part of European and Japanese manufacturers and sharply increased prices for crude oil.

From 1984 to 2000, the merchandise trade balance topped $100 billion in all but the recession years of 1991 and 1992, even as trade volumes increased absolutely and relative to GNP. In 1997, it exceeded $200 billion, as exports nearly reached $900 billion and GNP hit $8 trillion for the first time. For the twelve months ending 31 December 2001, the merchandise trade deficit stood at $425 billion. A surplus in services, which grew from $6.1 billion in 1980 to $85.3 billion in 1997, has offset 30 to 40 percent of the deficit on goods. America has funded its trade deficit largely by attracting foreign investment, so that it runs large surpluses on its capital account. As a result, the United States became the world's largest debtor on its current account during the 1980s and remained so at the beginning of the twenty-first century.

BIBLIOGRAPHY

Balaam, David N., and Michael Veseth. Introduction to International Political Economy. Upper Saddle River, N.J.: Prentice Hall, 1996. See chapter 8.

Lovett, William A., Alfred E. Eckes Jr., and Richard L. Brink-man. U.S. Trade Policy: History, Theory, and the WTO. Armonk, N.Y.: M. E. Sharpe, 1999.

Thompson, Margaret C., ed. Trade: U.S. Policy Since 1945. Washington, D.C.: Congressional Quarterly, 1984.

U.S. Department of Commerce. Historical Statistics of the United States: Colonial Times to 1970. Washington, D.C.: General Printing Office, 1975.

Walton, Gary M., and Hugh Rockoff. History of the American Economy. 8th ed. New York: Harcourt, Brace, 1998.

Michael R. Adamson

See also Debt and Investment, Foreign ; Trade, Foreign .