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Trade, FDI, and the Dollar: Explaining the U.S. Trade Deficit

October 15, 1996 | Michael Blaine | Operations

Blaine attributes the U.S. trade deficit to the declining capacity of the United States to satisfy domestic demand for manufactured products with domestic production. Every year, more Americans buy more from other countries than foreigners purchase from the United States. U.S. companies have contributed to the problem by shifting their manufacturing to companies overseas. At the same time, foreign firms are exporting more goods to the United States. Thus, says Blaine, the bulk of trade occurs between foreign units of companies rather than between independent companies located in foreign countries.

According to Blaine, in his study of extensive data from a multitude of sources, multinational corporations will have a greater role in shaping international trade flows than will nations themselves. This, in turn, diminishes the efficiency of traditional macroeconomic policies. And countries like the United States that rely on the exchange rate to give firms an incentive to increase exports are less successful than countries like Japan that develop policies to give firms an incentive to increase export activities. Thus, says Blaine, changes in the value of the dollar will have only minimal effect on the trade deficit. The only way to correct the trade imbalance, then, is for U.S. firms to increase domestic production and stop satisfying U.S. demand with products made abroad.

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