Causes of the U.S. merchandise trade deficit since 1981

Global Economics

What has caused the U.S. To run a merchandise trade deficit since the early 1980s?

Since 1981 the merchandise trade deficit has expanded due to a rapid expansion of imports. In 1982, the first year for which full statistics are available, the ratio of imports to exports on a census basis was 1.127. By 1994, halfway through the survey period, the ratio was 1.329. In 2006, the ratio was 1.788.

Imports grew 659% from 1982 to 2006.

Among import categories, the largest gainer in terms of raw numbers is Industrial Supplies and Materials. However, the percentage growth in that category was actually less than the growth of Imports overall. Two import categories dramatically outpaced Imports as a whole. They were Capital Goods (except automobiles) at 1081% growth and Consumer Goods (except automobiles) at 1014% growth. All categories of exports grew slower than the Import growth rate.

Is the current account a deficit problem?

The current account deficit is generally considered to be a problem. The current account deficit is essentially financed by foreign entities and they have the ability to choose where they invest their money. Should these entities decided to pull their money out of the U.S. And invest it elsewhere, this could have disastrous consequences for the economy. Additionally, being so highly leveraged leaves the U.S. exposed to shifts in interest rates.

However, the Pitchford Thesis holds that as long as current account deficits are the product of reasonable private market decision-making they are not a problem. The Pitchford Thesis was developed in and has generally been applied to Australia. With regards to the U.S., it is thought that this thesis will also hold true and no catastrophe will occur.

How is the current account related to a country's business cycle?

The current account is related to the business cycle in many ways. One is that the types of imports and exports will be affected by the business cycle. In a slumping economy, imports decrease, but exports may hold steady. Another way in which the business cycle is related to the current account is that measure taken to address business cycle issues, such as trade barriers, subsidies or exchange rate policy can impact the current account by altering the balance of trade. However, it would take a substantial change in the business cycle in order to affect the current account at this point. The country would need to reduce imports dramatically, as happened in Argentina following their currency collapse. Regular business cycle shifts will impact the current account but the deficit is presently so large that it these impacts will not reverse the current trends unless the change in the business cycle is catastrophic.

What is the relationship between a country's net financial inflows & its current account?

The relationship between the net financial flow and the current account deficit goes both ways. Changes in either one will result in changes to the other. The two represent a zero sum game. Financial inflows should directly match current account outflows. In theory the market responds to any disequilibrium between the two, causing adjustments in interest or exchanges rates that bring the financial inflows and current account deficit back into equilibrium.

How does the U.S. make adjustments for the balance of payments issues?

The U.S. has several tools that it uses to adjust balance of payment issues. Some countries use capital controls, but the U.S. seldom does this. They are more likely to alter the interest rate, or use their reserves to affect their exchange rate. This affects the value of the inflows and deficit.

They can also work at the microeconomic level by erecting trade barriers to stem specific flows. This is seldom used as macroeconomic policy but is a government policy that impacts the balance of payments.