Why intangibles trade can't overcome the goods deficit

As regular readers of the blog know, every month I publish a look at the U.S. trade in intangibles (defined as royalties/fees and business services). And every month I include charts (such as the one below) that show the stark contrast of our trade deficits in goods with our trade surplus in intangibles. I include this chart to show that the answer to the trade deficit lies in coping with the goods deficit – not in hoping intangibles will save us.
To better illustrate that point, my friend Charles McMillion over at MBG Information Services has construction the chart below that shows how much the intangible surplus offsets the goods deficit. In 1991, the intangibles offset about half of the goods deficit. Even in the Great Recession when the good deficit declined, intangibles offset only about about 20% of the goods deficit. The size of the offset has generally moved in the wrong direction.
The problem is not because the intangibles surplus hasn’t grow — it has. But the goods deficit has exploded. As I have argued before, the real power of intangibles in international trade is not confined to the pure trade in intangibles. The power is in the value of the intangibles embedded in the goods. Exporting a high value added good that incorporates a strong design element, for example, is better than exporting that design element alone.
In order to compete more effectively, both domestically and abroad, we need to better utilize the intangibles assets resident in American companies. Thus, we need to both expand intangibles trade and revitalize our manufacturing trade by, among other things, infusing our goods with higher levels of knowledge and other intangibles.
Annual - intangibles v goods 2011 Jan revision.gif


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