Making Sense of the Dollar

“Myth 1: The Trade Deficit Reflects U.S. Competitiveness”

Antiquated accounting methods distort the picture of the United States’s international competitiveness. When a U.S. company sends parts abroad for assembly and then brings back a finished product, trade accounts record the transaction. Because the finished product has a higher value than the parts exported, the U.S. trade deficit grows. However, the entire transaction has taken place within a single company. Does such accounting make sense?

Trade accounting ignores much of the value that an American export creates. For instance, the trade value of services is notoriously hard to calculate. Europeans who vacation in the U.S. consume tourism services, but trade accounts do not reflect such transactions. Balance of payment accounts also do a poor job of measuring the value added by technology, specialized skill and management ability. Antiquated accounting fails to measure the right things and leads to misconceptions about what policymakers should do. The trade deficit is not a problem that needs to be corrected; the problem that needs correcting is the way trade is measured. International trade does not put American...