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Staff Pick: Early U.S. Trade Deficits and Industrialization

Monday, March 8, 2021
Antique illustration of scientific discoveries: Steamboats: The Clermont, New York - stock illustration

The On the Economy blog will periodically rerun blog posts that were of particular interest. The following post is the first in a two-part series from July 2020 that examines the link between the stages of U.S. industrialization and the country’s balance of trade.

Trade deficits for the U.S. are nothing new. From 1800 to 1870, the U.S. ran a trade deficit for all but three years. While trade surpluses were persistent for the hundred years following that period, the country began to run trade deficits again around 1970 that has continued since.

In a Regional Economist article, Assistant Vice President and Economist Yi Wen and Research Associate Brian Reinbold explored the link between industrialization and historical U.S. trade flows. They hypothesized that different phases of industrialization lead to structural changes that cause a nation’s comparative advantage to change relative to those of other nations. Countries trade based on their comparative advantage, the authors point out, so a country entering a new stage of development would expect to see long-term changes to its trade.

The Three Phases of Industrialization

Industrialization has historically had three phases, the authors explained:

  1. The first industrial revolution: labor-intensive mass production of light consumer goods, like processed food and textiles
  2. The second industrial revolution: capital-intensive mass production of heavy industrial goods, like steel, machinery, equipment and automobiles
  3. The welfare revolution: mass consumption in a service-oriented welfare state

This blog post focuses on phase 1, which took place from 1800 to 1870 in the U.S.

A Latecomer to Industrialization

Europe began to industrialize in the late 18th century, while the U.S. didn’t start until the early 19th century. This meant that the U.S. still had to import many manufactured goods—including machinery and other capital goods—while exporting crude materials such as cotton. Since the U.S could not produce manufactured goods as cheaply as Europe, it ran large trade deficits in manufactured goods throughout most of the 19th century, the authors explained.

U.S. Trade balance of raw materials and manufactured goods as a percentage of GDP.

The authors broke down the category of manufactured goods into three types:

  • Manufactured foodstuffs (such as meat, sugar and processed fruits)
  • Semimanufactures (such as lumber, refined copper, and iron and steel plates)
  • Finished manufactures (such as textile manufactures, machinery, equipment, automobiles and their parts, metal and steel, chemicals, and radios)

Typically, the first sector to industrialize is manufactured foodstuffs, which takes little capital and lots of labor, the authors wrote. Semimanufactures generally require more capital and sophisticated manufacturing processes, while finished manufactures require significant amounts of capital and maturation of other manufacturing processes.

From 1821 to 1870, the U.S. posted slight deficits in manufactured foodstuffs and semimanufactures and substantial deficits in finished manufactures, which it relied on importing from Europe. Therefore, Wen and Reinbold pointed out, the U.S.’s stage in development relative to other industrial nations led the country to run deficits in manufactured goods.

Trade deficits during this time did not inhibit U.S. development, the authors added, but may have even facilitated industrialization as the country imported capital goods to improve its own manufacturing.

Additional Resources

Posted In TradeOutput  |  Tagged yi wenbrian reinboldtrade deficittrade balanceindustrializationindustrial revolutionstaff pick