No aspect of international trade is talked about more and understood less than America's perennial trade deficit. Critics of free trade, and most Americans for that matter, believe the trade deficit is prima facie evidence that American companies are failing to compete in global markets or that U.S. exporters face "unfair" trade barriers abroad, or both. The obvious implication is that, if other nations were to open their markets as wide as we have supposedly opened ours, or if American companies became more competitive against foreign rivals, we could export more relative to imports, thus reducing the trade deficit.

America's trade deficit is not a cause for alarm. It is not caused by "unfair" trade practices abroad or a lack of industrial competitiveness at home. The trade deficit results from a net inflow of foreign capital into the United States, capital drawn by America's vibrant and growing economy. Without this capital inflow, domestic interest rates would be higher, investment lower, and long-term growth rates slower.

Imports do not harm the American economy. They raise the living standards of U.S. workers and provide low-cost inputs and capital equipment for American industry. Imports do not reduce the number of jobs in our economy. They help to create better jobs by allowing Americans to shift resources to sectors where we can be even more productive.

The LATEST from the Center for Trade Policy Studies on the Trade Deficit and Imports

• Congressional Testimony: The Large Stake of U.S. Small Business in an Expanding Global Economy (June 13, 2007)

• Free Trade Bulletin no. 27: Are Trade Deficits a Drag on U.S. Economic Growth? (March 12, 2007)

• Toasting China (December 12, 2006)

• American Worry-Mongering About China (August 1, 2006)

• Free Trade Bulletin no. 22: Blowing Exhaust: Detroit's Woes Belie a Healthy U.S. Auto Market (July 27, 2006)

MORE from the Center for Trade Policy Studies on the Trade Deficit and Imports