Trade Deficit Doesn't Capture U.S. Competitive Edge

Cross-border trade and the trade deficit are insufficient indicators of U.S. competitiveness, according to a new report released today by the Council on Competitiveness, titled Competitiveness Index: Where America Stands. The periodic economic benchmarking report is co-authored with Harvard Business School professor Michael Porter.

The report concludes that the U.S. trade deficit is not an accurate measure of global competitiveness because it does not account for many of the assets that give the United States its competitive edge. Intangible investment in the U.S. economy is estimated to be as high as $1 trillion, roughly the same as investment in tangible capital, according to data cited in the report.

These intangible assets include high-value services, global branding, technological know-how, and scientific research.

The constantly shifting global networks of multinational firms make it difficult to track whether the U.S. economy gets credit for overseas activities of U.S. firms. The report cites data that shows U.S. multinationals now sell 300 percent more through foreign operations than through exports.

"The world of global trade has changed significantly since the 1980s, but our methods for understanding and measuring these changes have not kept up with the pace of global transformation," says Deborah Wince-Smith, president of the Council on Competitiveness. "The Competitiveness Index addresses long held assumptions about our ability to compete abroad and what we can do to prepare the U.S. workforce for the future."

Phenomenal U.S. Productivity Growth

The report benchmarks two decades of U.S. economic data against emerging global economies. It confirms the United States has among the highest levels of productivity and standard of living, making it the most globally competitive among the world's large economies.

The report notes that the United States generated tremendous economic growth over the past two decades, remaining the world's largest economy and nearly doubling GDP since 1986. The United States had a 3.1 percent growth rate between 1986 and 2005, which out paced those of other major economies like the European Union, which had a 2.4 percent growth rate; and Japan, which had a 2.1 percent growth rate.

Standard of living in the United States also remains the highest among major nations. Disposable incomes are up 37 percent and average household wealth is up 61 percent since 1986.

Global Imbalances Raise Red Flags

The report cites data that shows the United States has stimulated export-led growth around the world while continuing to attract the largest share of foreign direct investment. The total stock of foreign direct investment in the United States is now $1.6 trillion, about twice that of the next largest recipient and more than six times as much as China. Between 1986 and 2004, the United States received more annual flows of foreign direct investment than any other country in the world.

However, this expansion has been funded primarily through rapidly increasing foreign debt, coupled with high consumption and a return to federal budget deficits. These imbalances raise serious warning flags for the future of American competitiveness and global economic stability, which the study discusses in depth.

Many indicators point toward the strength of the U.S. economy's underlying microeconomic conditions, while other economies are also growing in size. The report finds no indication that this comes at the expense of the United States.

"Competitiveness is not a zero-sum game and the success of other economies is not a failure of U.S. competitiveness," says Porter, a Harvard Business School professor and co-author of the report. "As all nations improve their productivity, wages rise and markets expand, creating the potential for rising prosperity for all."

Preparing the U.S. Workforce for 21st Century Prosperity

While the Competitiveness Index makes no specific recommendations, it highlights several key issues critical for America's future competitiveness. Adequately educating the workforce is identified as a serious area of concern.

The report notes that 21st Century American prosperity depends on improved education as globalization alters the criteria for competitiveness. It cites data that shows people with higher levels of education in the United States have seen rapid increases in income and wealth.

Households headed by people with less than a college degree have seen their incomes fall on average over the past two decades.

Unlike in past decades, higher-order thinking and knowledge will trump industrial-age efficiency as traditional skills are becoming less relevant. The future will also require workers to be more adaptable because of the dynamic churn of jobs, companies and entire industries.