BPEA | 1987 No. 1

The Persistence of the U.S. Trade Deficit

Paul R. Krugman and
Paul R. Krugman Princeton University
Richard E. Baldwin
Richard Baldwin
Richard E. Baldwin Professor of International Economics - IMD Business School, Lausanne
Discussants: Peter Hooper and
Peter Hooper Managing Director, Chief Economist - Deutsche Bank Securities
Barry P. Bosworth
Barry P. Bosworth Nonresident Senior Fellow - Economic Studies

1987, No. 1

THE FAILURE of the U.S. trade deficit to show marked improvement after two years of a falling dollar has become a major source of strain in the politics of economic policy. Frustrated with the persistence of the trade deficit, the administration has demanded reflation by unwilling German and Japanese governments. Congressional calls for protectionist measures have become increasingly strident. Also at stake is the credibility of mainstream economists. Since signs of a deterioration in U.S. trade performance became clear-cut in 1982, most economists have argued that the fault lay in the strong dollar, not in other popular villains such as foreign countries’ industrial policies. Further, the role of the dollar in causing the trade deficit is a key part of the widely accepted doctrine that links trade deficits to the federal budget deficit. If the trade deficit remains intractable, this doctrine, which has served as a potent defense against nationalistic views of the trade problem, will soon lose its effectiveness.