Peterson Institute publications
The Peterson Institute for International Economics is a private, nonprofit, nonpartisan
research institution devoted to the study of international economic policy. More › ›
RSS News Feed Search

Policy Brief 06-9

Can America Still Compete or Does It Need a New Trade Paradigm?

by Martin Neil Baily, Peterson Institute for International Economics
and Robert Z. Lawrence, Peterson Institute for International Economics

December 2006

View full document [pdf]

The relentless increase in the US trade deficit since the early 1990s has raised concerns about America’s ability to compete in international markets and given rise to calls for new ways to think about international competition and new ways of responding to US trade deficits. This policy brief challenges such views. It reports evidence that indeed it has become harder for the United States to sell its goods overseas over the past decade. However, the change has been modest and well within historical experience. The exchange rate of the dollar is the major factor leading to the trade deficit rather than any structural inability of US manufacturing or services to compete in the new global environment. Accordingly, we judge that there is no need for a new trade paradigm, and it would be a mistake to adopt protectionist trade policies. Two simultaneous adjustments are required to bring about a smaller trade deficit. First, spending must switch from foreign to US goods. In addition, since the United States must reduce its borrowing from abroad, spending must fall relative to income. This expenditure switching can be induced by a decline in the dollar. An increase in national saving, public and private, or alternatively and less desirably, a reduction in investment could both slow spending. Trade restrictions, on the other hand, are either ineffective, more costly, or both.


Book: Understanding the Trans-Pacific Partnership January 2013

Book: The Trans-Pacific Partnership and Asia-Pacific Integration: A Quantitative Assessment November 2012

Policy Brief 12-21: How Can Trade Policy Help America Compete? October 2012

Policy Brief 11-20: The United States Should Establish Permanent Normal Trade Relations with Russia November 2011

Policy Brief 11-8: What Should the United States Do about Doha? June 2011

Book: The Long-Term International Economic Position of the United States April 2009

Op-ed: Trade: An Opportunity About to Be Lost? May 20, 2011

Op-ed: New Imbalances Will Threaten Global Recovery June 10, 2010

Op-ed: How Best to Boost US Exports February 3, 2010

Op-ed: Cooling the Planet Without Chilling Trade November 13, 2009

Paper: Submission to the USTR in Support of a Trans-Pacific Partnership Agreement January 25, 2010

Working Paper 09-2: Policy Liberalization and US Merchandise Trade Growth, 1980–2006 May 2009

Policy Brief 09-2: Buy American: Bad for Jobs, Worse for Reputation February 2009

Paper: Report to the President-Elect and the 111th Congress on A New Trade Policy for the United States December 17, 2008

Book: American Trade Politics, 4th edition June 2005

Op-ed: The Payoff from Globalization June 7, 2005

Policy Brief 08-5: World Trade at Risk May 2008