Strong growth, low inflation--and a substantial trade deficit? In a blue sky of upbeat economic statistics, the trade numbers have been a dark cloud. The latest figures, released by the Census Bureau on May 21, show that the U.S. trade deficit narrowed a bit in March from February, thanks to stronger exports. But so far this year, the trade deficit in goods is running at an annual rate of $203 billion, up from $133 billion in 1993.

The last time the trade deficit soared so high, in the 1980s, it was a national crisis and a sign of America's economic deterioration. As the trade deficit hovered around $150 billion in 1986 and 1987, politicians vied to see who could be more protectionist. And why not? America's industrial heartland appeared powerless against efficient German and Japanese competitors. The semiconductor industry appeared ready to surrender to the Japanese and the rising nations of East Asia.

But today's trade deficit, while larger than those of the 1980s, is far less menacing. Low unemployment rates indicate that few workers are being hurt by rising imports. Moreover, U.S. companies are maintaining their competitive edge in the high-skill, high-wage industries that have increased in importance as components of the national economy. As a result, the growing trade deficit has far fewer economic consequences than it did in the 1980s.

TECH STRENGTH. Consider the notion that imports cost Americans jobs. That certainly rang true in 1986, when the national unemployment rate was 7% and many states were still stuck with near-recession levels of joblessness. Michigan, Ohio, Washington, and Texas--and 15 other states--had unemployment rates of 8% and above. Small wonder that imports were seen as a key cause of the joblessness, and that unemployed auto workers could be seen on the nightly news smashing Toyotas with sledgehammers.

Today, with the national unemployment rate just below 5%, there's little evidence that imports are depriving anyone of jobs. Currently, only five states have unemployment rates exceeding 6%. Indeed, a more real concern than the trade deficit might be that the Federal Reserve, eyeing the low unemployment figures, could boost interest rates at some point to head off inflation.

Perhaps more important, the nature of the trade deficit has changed over the past decade. In the 1980s, the U.S. saw its competitive position in capital goods such as computers and machinery erode sharply. From 1983 to 1987, almost 70% of the growth of the merchandise trade deficit was in capital goods and automobiles (table). At the time, those were America's high-wage, high-skill industries.

But in the 1990s, the U.S. has held its own in capital goods. Moreover, despite the widening trade gap, the U.S. is now exporting advanced technology products such as aircraft and high-tech equipment at rates that could produce a $36 billion surplus this year. That's up from a surplus of $25 billion in such goods in 1996. And the category is no longer so dominated by big aircraft purchases, either. Exports of information-technology equipment such as semiconductors, computers, and accessories are up 3% over last year, while imports of info-tech equipment are down 3%.

NEW THINKING. The nature of the trade disputes has changed as well. In the 1980s, trade frictions revolved around Japan's bulging sales of autos and electronics to the U.S. Today, it's China that has become the focus of trade tensions. Indeed, the flood of Chinese goods has complicated the Clinton Administration's efforts to extend China's most-favored-nation status.

Despite the turmoil, however, a growing trade deficit with China is much less worrisome than a similar deficit with Japan. Japan was a surging industrial and technological rival, and its trade success did have implications for America's competitiveness. China, in contrast, is primarily taking advantage of low wages to produce inexpensive goods for export.

It's time to get away from thinking about the trade deficit as the scorecard on the economy. The prosperity of the U.S. is based on its rising productivity and high-tech investments--and that's true whether the trade deficit rises or falls.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE