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Energy Independence Won’t Slash the Trade Deficit: Study

by Michael Levi
January 27, 2014

Most things about the U.S. oil and gas boom are controversial, but one consequence seems pretty widely agreed: as the United States cuts its oil imports, its trade deficit will fall, solidifying the country’s position in the world.

But in a study published today by the Council on Foreign Relations (CFR) project on energy and national security, Robert Lawrence argues that the conventional wisdom is wrong. In the long run, he argues, falling U.S. oil imports will spur developments elsewhere in the economy that will offset their impact on the trade deficit. The net result, he concludes, is that the trade deficit will be little changed.

Short-run dynamics, though, can be different, which is a big part of why several serious modeling efforts have projected a falling trade deficit as a result of reduced oil imports. One of the particularly enlightening parts of the Lawrence paper is its unpacking of the short run dynamics. (I should note that as with all CFR publications, all the conclusions are those of the author, not of CFR or any part of it.) Different analysts can come to very different conclusions about the trade deficit depending on their assumptions about some basic economic parameters, such as the multiplier effect of increased investment – and the paper shows how particular assumptions influence analysts’ ultimate results.

Check out the whole paper here. And don’t hesitate to discuss the study in the comments.

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