ABOUT THE U.S. TRADE DEFICIT

In 2016, the U.S. exported $ 2.2 trillion in goods and services while it imported € 2.7 trillion, leaving a trade deficit of roughly $ 500 billion.  Today’s $ 500 billion deficit represents about 2.7 percent of US GDP. By far the largest bilateral trade imbalance is with China. The United States ran a $ 347 billion deficit with China in 2016. The next largest contributor to the deficit at $ 68 billion is Japan and the third contributor in Europe is Germany at $ 65 billion.

Services such as tourism, intellectual property and finance, make up roughly one third of exports, while major goods exported include aircraft, medical equipment and agricultural commodities. Meanwhile imports are dominated by capital goods such as computers and telecom equipment, consumer goods such as apparel, electronic devices, and automobiles and crude oil.

The deficit in goods at $ 750 billion is higher than the overall deficit, since a portion of the goods deficit is offset by the surplus in services trade.  Of the $ 750 billion goods deficit, nearly $ 600 billion consists of manufactured consumer goods and automobile parts.

The balance of imports and exports, or the trade balance, is part of the broader measure of the U.S. economy’s transactions with the rest of the world, known as the balance of payments. The economy’s balance of payments consists of the trade balance, or current account, and the financial accounts, or the measures of U.S. purchase and sale of foreign assets. The financial accounts include financial assets such as stocks and bonds as well as foreign direct investment (FDI). These accounts generally balance since a current account deficit (the trade deficit) results in a corresponding financial account surplus as foreign capital and investment flows into the country.

Causes of Trade Deficit

The fundamental cause of a trade deficit is an imbalance between a country’s savings and investment rates. The reason for the deficit can be boiled down to the United States as a whole spending more money than it makes, which results in the current account deficit. That additional spending must by definition go toward foreign goods and services. Financing that spending happens in the form of either borrowing from lenders (which adds to the national debt) or foreign investing in US assets and businesses- the capital account.

Forces influencing the size of the trade deficit

1. More government spending, if it leads to larger federal budget deficit reduces the national savings rate and raises the trade deficit. A portion of the budget deficit is effectively financed through a rise in the total amount Americans borrow from abroad.
2. The exchange rate of the dollar is important, as a stronger dollar makes foreign products cheaper for American consumers while making U.S. exports more expensive for foreign buyers.
3. A growing US economy also leads to a larger deficit, since consumers have more income to buy goods from abroad.

The above factors are more important than trade policy in determining the overall deficit. That’s because making it easier or harder to trade with specific countries tends to simply shift the trade deficit to other trading partners. Thus, economists warn against conflating bilateral deficits, which reflect the particular circumstances of trading relationships with specific countries, with the overall deficit, which reflects underlying forces in the economy

Options to reduce the deficit

1. Negotiate better access to the Chinese market for US exporters could help. There are high tariffs, subsidies, and other barriers facing U.S. goods in China and Europe.
2. Unilateral measures to block imports due to concerns over foreign subsidies would likely anger US allies and harm many US industries.
3. A weaker dollar, too, would likely help boost US exports.
4. Economic reforms in surplus nations could help.
5. The United States should pressure countries that use foreign reserve purchases to manipulate their exchange rates by having the U.S. government counter-purchase the foreign currencies of manipulating nations.
6. Policymakers should pressure China and other Asian countries to enact policies that will bring down their savings rates.
7. In the domestic policy arena, boosting the US savings rate could also bring down the trade deficit. As the IMF and others have pointed out, one of the most direct way to do that is to reduce the US government budget deficit.

Conclusion

Too much focus on the trade deficit could lead to a revival of protectionism and a new global trade war that would make everyone worse off, especially in an era of supply chains that cross many borders. Promises that restrictions on imports will revive manufacturing ignore that technology plays a much larger role in deindustrialization than does trade, and that the US  economy began shifting away from manufacturing long before the proliferation of trade agreements in the 1990s.

It is better to recognize that the trade deficit is neither all good or all bad bur rather consists of trade-offs: the US economy benefits from foreign goods and investment even as a high deficit displaces some workers and adds to the national debt.

Contributors to US Trade Deficit (2016)

1. China: 347 Billion
2. Japan: 69 Billion
3. Germany: 65 Billion
4. Ireland: 36 Billion
5. Vietnam: 32 Billion