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Net Exports Are a Net Negative

In an age of globalization and in an increasingly flat world, the long-term growth rate of any nation's economy often is ultimately determined by the strength or weakness of a country's net exports—the difference between what a country sells to the rest of the world and what it buys.

On the plus side, a nation's exports make a positive contribution to economic growth by creating domestic jobs. On the negative side, however, when the United States buys foreign oil from countries such as Saudi Arabia and Venezuela or foreign steel or electronic goods from countries such as Germany and China, these other countries enjoy the benefits of increased jobs, wages, and GDP growth.

Of course, when a country such as the United States imports more than it exports, it is running a trade deficit, and its net exports are negative in the GDP Growth Driver equation. That's precisely the problem we observed in Exhibit 1.1. Although America kept its trade balance at close to even throughout much of the postwar period leading up to 2000, it has run significantly larger trade deficits since the beginning of the nought decade. By the simple arithmetic of the GDP growth equation—and like a crooked college hoopster—these negative net exports shave critical growth points off America's economic growth rate.

To be clear, we're not implying that imports per se are in any way negative for a nation. Imported goods provide consumers with much more choice while helping lower prices in markets around the world. Rather, the problem comes when America runs large trade deficits over a much extended period.

In fact, America's chronic deficits have three primary sources. The first is the anticompetitive nature of our corporate tax system. Not only must American exporters contend with the second-highest corporate tax burden of all the major economies in the world, but they also face a "double taxation" on anything they earn abroad.

The second source of America's trade deficits is what former President George W. Bush once called America's addiction to foreign oil. America depends on foreign oil imports for over half of its oil needs, and America's petroleum import bill accounts for over 40% of the total U.S. trade deficit.

These expenditures on foreign oil effectively act as a "tax" on both American consumers and American businesses. When American consumers pay more to foreign oil producers to heat their homes and fill their gas tanks, that's money lost that could otherwise go into driving the domestic economy. By the same token, when American businesses pay more for their energy needs, this drives up production costs, reduces the competitiveness of American businesses, and leads to lower output and fewer jobs.

The third source of America's chronic trade deficits is the mercantilist and protectionist trade policies of our major trading partners—particularly our largest trading partner, China. This has resulted in a related structural imbalance between savings and consumption, in which Asia saves too much and the United States consumes too much.

Reducing the U.S.–China trade and savings imbalances is particularly important in America's long-term economic recovery. This is because Chinese exports to the United States constitute fully 45% of America's trade deficit and 75% when petroleum imports are excluded.

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