The U.S. has run a persistent trade deficit over the past few decades, similar to much of the 19th century. The shifts in the U.S. trade balance over time seem to correspond with U.S. industrialization in a global setting, according to a recent Economic Synopses essay.
“We hypothesize that industrialization leads to structural changes that cause a nation’s comparative advantages to change relative to those of other nations,” wrote Assistant Vice President and Economist Yi Wen and Research Associate Brian Reinbold.
“Since countries trade based on their comparative advantages, we would expect to see long-term changes to a country’s trade as it enters a new stage of development,” they added.
Wen and Reinbold looked at the U.S. goods trade balance as a percentage of GDP from 1800-2018. They highlighted three periods:
They described how these long-term trends can be understood in the context of U.S. development and the three phases of industrialization.
Wen and Reinbold noted that U.S. industrialization began in the early 19th century and focused on labor-intensive manufacturing, such as textiles. However, they added that the U.S. still had to import many manufactured goods (such as machinery and other capital) and relied on exports of raw materials (such as cotton).
Europe began to industrialize in the late 18th century, earlier than the U.S. “Europe could produce manufactured goods more cheaply, and the United States could not yet match Europe’s prolific innovations,” they wrote. “As a result, the United States ran large deficits in several classes of manufactured goods throughout most of the 19th century.”
Around 1870, the U.S. transitioned to the second phase of industrialization, which featured capital-intensive mass production of manufactured goods and machinery, the authors explained. They also noted that the U.S. trade balance went from persistent trade deficits to persistent trade surpluses around that time.
“Increased sophistication and maturation of U.S. manufacturing drove this change as the United States relied less on imports of manufactured goods and increased its exports of manufactured goods. By the turn of the century, the United States—now a manufacturing powerhouse—ran a full-fledged surplus in manufactured goods,” the authors wrote.
The U.S. has transitioned to the third phase of industrialization since the 1960s. In particular, the authors noted that the U.S. has shifted to the welfare stage, which features mass consumption with financial innovations.
“This shift implies that the United States became able to consume more tangible goods than it produced by providing financial services to the world,” they wrote.
Wen and Reinbold added that the U.S. trade balance shifted during the early 1970s from trade surpluses to trade deficits since U.S. financial assets became more attractive to foreign investors.
The authors noted that not all developing countries will follow the same pattern as the U.S. regarding shifts in the long-term trade balance—that is, from trade deficits to surpluses then back to deficits.
“But it seems reasonable to expect that transitions into different stages of industrialization will cause structural changes in an economy, including changes in comparative advantages relative to other nations; and comparative advantage is what international trade is based on,” they wrote.