KRWG

The Trade Deficit Is A Complex Issue

Sep 24, 2018

Commentary: In economic terms, a country’s balance of trade compares what it exports to the world to what it imports. If a country exports more than it imports, it is said to have a trade surplus. If it imports more than it exports, it has a trade deficit. Such is the case in the U.S., which has not had a trade surplus since 1975, when it exported $12.4 million more than it imported. During the 1980s, the U.S. trade deficit ballooned, tapered off somewhat in the early 1990s, and then rapidly rose at the end of that decade. It has been rising ever since, growing to $566 billion in 2017.

According to the Bureau of the Census, the countries with which the U.S. runs its highest trade deficits are China ($636 billion traded, $375 billion deficit), Mexico ($557.5 billion traded, $71 billion deficit), Japan ($204 billion traded, $69 billion deficit), and Germany ($171 billion traded, $65 billion deficit). Looked at collectively, the U.S. trades $3.8 trillion with the European Union and runs a trade deficit of $795 billion. With Canada, one of our North American Free Trade Agreement (NAFTA) partners and the U.S.’s single biggest trading partner in general, we trade $582 billion and have a $17 billion trade deficit.

On September 5, the U.S. Department of Commerce reported that the July U.S. trade deficit increased by 9.5 percent to $50.1 billion, a five-month high and the largest monthly jump in the trade deficit for the past three years. Exports fell by 1 percent to $211.1 billion, while imports rose 0.9 percent to $262.2 billion. The trade deficit increased significantly with Canada (up 57.6 percent) the European Union (up 50 percent) and China (up 10 percent). U.S. exports of products such as soybeans and aircraft decreased during July, most likely due to the tariff battle that the U.S. is waging with our trading partners. All of this is occurring despite President Donald Trump’s efforts to decrease the trade deficit by slapping tariffs on trading partners and renegotiating NAFTA.

So why is this occurring? Trade deficits occur for several reasons. Perhaps, a country does not need what the U.S. produces, which is not the case for most countries. Second, it could be that a country has a strong trading relationship with the U.S, but its economy is smaller and it tends to import less from the U.S. than it exports. Third, in many cases, consumer products such as televisions, cell phones, and toys can be produced more economically in foreign countries where the labor cost is lower than the U.S.  This allows Americans to purchase more of these items than if they had been produced in the U.S.

A good example of this in practice is the proliferation of the Dollar General, Family Dollar, and Dollar Tree stores, which sell consumer products at rock bottom prices. Most of these products are foreign-made in countries with economical labor such as China, India, and Vietnam. It’s the people who shop at these stores in order to save money who are most affected by tariffs. On the other hand, the U.S. has a comparative advantage and exports products that it can produce more efficiently and innovatively, such as high-tech and agricultural products.

Trade deficits are not black and white, but rather more of a gray. Importing more than you are exporting can lead to an outflow of capital. However, importing from countries that can better produce cheaper consumer products allows Americans to allocate more money for local major purchases such as houses. Furthermore, the trade deficit goes up when the dollar is strong and/or if the U.S. economy is doing well. It decreases when the dollar depreciates in world financial markets or the economy is in a recession. The U.S. is an affluent country in which even people of modest means can afford items such as cell phones, cable TV, and vehicles. Trade puts a lot of these items in the reach of more people.

At this point, the strongest case for why the U.S. trade deficit is going up is that the economy is strong, as is the dollar, and in good financial times people spend more money on goods and services. And as people spend more, the personal savings rate has declined to 6.7 percent, which means that for every $100 dollars an American generates, only $6.70 are put away for use in the future. From 1959 to 2018, the U.S. personal savings rate has averaged 8.23 percent. Another more ironic reason that could partially explain the rising trade deficit is that consumers and business are rushing their purchases or stocking up on items that will be subject to tariffs that the Trump administration will be imposing in the near future.

Even as the Trump administration continues to slap tariffs on countries with which we run a trade deficit, this strategy cannot compete with the free-spending American who has a strong dollar and good economy with which to purchase foreign goods.

Jerry Pacheco is Executive Director of the International Business Accelerator, a non-profit trade counseling program of the New Mexico Small Business Development Centers Network, and the President/CEO of the Border Industrial Association.  He can be reached at 575-589-2200 or jerry@nmiba.com