What’s the Big Deal About a Trade Deficit? : A VECM Analysis of Causality Between U.S. Economic Growth and its Trade Balance with NAFTA

Since 1981, the United States has managed a trade deficit that has become more negative with each passing year. Yet, economic growth has been on a positive trend. Is there a relationship between the two? Using annual data from 1950 to 2014, this article investigates the causal relationship between the trade balance of the United States and its gross domestic product using a Johansen VECM model. The author analyzes trade balance between the United States and each NAFTA country and China. The results indicate no causal relationship from U.S. GDP to its trade balance. However, we find short-run negative causality, running from the trade balance to GDP. This finding has trade policy implications