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Against the backdrop of slowing U.S. economic growth and rising economic uncertainty among most working Americans, we as a nation at least find comfort in the underlying resilience of an economy traditionally strong in creativity and innovation. After all, a skilled and innovative workforce has fueled American productivity and economic growth for decades, allowing the United States to remain at the forefront of global competition, especially since the mid-1990s.
Why should the first decade of the 21st century be any different?
Alas, it is. A snapshot of global trade statistics in advanced technology products since 2002 reveals that U.S. economic competitiveness in innovation may be slipping away. Surprisingly, the United States has recorded a deficit in high-technology products over the past five years. By the end of 2007, our nation’s high-tech deficit reached new record highs, measured either in absolute terms or as a share of the overall trade deficit. Specifically:
The high-tech trade balance is growing apace. Prior to 2002, the high-tech trade balance kept the total U.S. trade deficit lower than it otherwise would have been. While the high-tech deficit accounted for less than 4 percent of the total trade deficit in 2002, it accounted for more than 7 percent in 2007.
The deterioration in the high-tech trade deficit is spreading. The growing trade high-tech deficit from 2002 to 2007 included a widening of the deficit in information and communication technology products by $57.5 billion, in opto-electronics products by $16.5 billion, and in nuclear technology products by $2.2 billion.
The United States is losing ground to a range of countries, led by China and Mexico. Mexico in particular has skyrocketed onto the scene, now surpassing Malaysia as our country’s second-largest high-tech trade deficit partner, with a deficit of over $21 billion in high-technology products in 2007. From 2002 to 2007, the rate of increase in the U.S. high-tech trade deficit with Mexico—at 492 percent—was higher than China’s 473-percent increase.
There is no single reason for our growing and widening high-tech trade deficit. The high-tech trade statistics indicate that our trading partners are moving up the value chain in high-tech products, possibly by identifying individual product niches they can concentrate on to boost their competitive edge over the United States.
What do these trends mean for U.S. economic policymakers? A rising trade deficit in our most competitive products requires a deft policy response. Our nation’s total trade deficit remains high despite a recent export boom due to the declining value of the dollar, in part because the high-tech trade deficit is increasing rapidly. High-tech products that once were our most competitive exports are losing their innovative edge in world markets.
In part, we can attribute this deterioration in the U.S. high-tech trade balance to the offshoring of high-technology jobs. As more high-tech manufacturers lower production costs and use increasingly qualified workers overseas, the high-tech industry in the United States suffers.
A larger and more deep-seated problem, however, has been the dramatic difference between U.S. innovation policies and those of our global competitors. As other countries have been investing in innovation to create a skilled workforce and encourage more research and development, the United States has, by and large, neglected to make innovation a policy priority. The U.S. high-tech trade deficit finds its roots in the negligence of our innovation policy and requires a strong policy response.