Trade Deficit: It's Not So Bad After All
Since 1976, the U.S. has been experiencing an increasing trade deficit. Today it has reached to about a half a trillion dollars. What does this actually mean and what should the U.S. do? The trade deficit has been increasing over several decades mainly for 3 reasons; a strong dollar during the 1980s and 1990s, rising incomes in the United States, and government trade deficits Some say that the trade deficit is bad for the economy and that we need to maintain a trade surplus, while others view our trade deficits as good for the economy. The U.S. government should not try to reduce the trade deficit because it is contributing to a stronger economy.
Even though we have had an increasing trade deficit, a concept called the “balance of payments” makes sure that current account deficits are offset by a capital account surplus. The balance of payments measures the amount of economic transactions between people in one country and the rest of the world. The current account includes trade in goods and services and unilateral transfers while the capital account is a record of international sales and purchase of financial assets. In addition to trade deficits, the U.S. dollar has been depreciating. Depreciation of the dollar would reduce trade deficits. The exchange rate would go up which will lead to foreign products becoming more expensive. We would import less and also our products would look cheaper. So why hasn’t the trade deficit gone down? One reason is that U.S. incomes are rising so that Americans can afford the more expensive foreign products. Should we decrease our incomes so that we can reduce our deficit? I think not. Our trade deficit is a sign of a strong economy for several reasons. Foreign countries are willing to lend us money because we are buying so much from them. This also shows that foreigners have confidence in the U.S. economy and our political system enough to invest here. The deficit also can be interpreted in a way that we get more products and services from other countries than we have to give them in return.
There is evidence that suggests that the trade deficit is present because of increasing global business profits. As the global economy strengthens the dollar is also depreciating which has created a significant rise in global earnings. According to an article by Joseph Quinlan, Federal Express have achieved higher than predicted quarterly results from international sales. Our trade deficits show that we have a dominant economy according to the Chicago Tribune. The article stated that because people from other countries have faith in our economy that , “they’re willing to accept a low return at the outset in the belief that owning U.S. Treasuries and the like will pay better in the long run.”
On the other side of the argument there a people that say the trade deficit is a threat to us. A trade deficit means that our exports are greater than our imports. Mercantilism views the trade deficit as a bad thing because supposedly more money is going out than coming in. But, this view disregards the important concept of the circular flow. A trade surplus means that we are not buying from other countries. In turn their incomes will be lower and they are not able to buy from us. There is evidence that countries with trade surpluses are not doing so well based on a news clipping for the Chicago Tribune. When Japan had a significant surplus with the U.S., its economy was “sinking”. Also the European Union has had slow economic growth and high unemployment because of their surpluses. The capital account surplus means that more foreigners are buying a lot of U.S. financial assets. Which means that foreigners are owning more U.S. companies. But that just shows that people in other countries feel that it is safe to invest here rather than elsewhere.
Even thought we have been warned for years about the U.S. increasing trade deficit. There is nothing yet that has happened to bring down the economy. If anything our trade deficit shows that we have a very dominant economy and that other countries want to do business with us. In order to stop the trade deficit we would need to stop making more money and stop trading. That would not get us anywhere and would stop the circular flow of trade which is needed in order to keep a balance, and help strengthen the economy.
Contact me at mthong@radford.edu or melanie.thong@gmail.com