The United States trade deficit: causes and economic impacts

Economics

One of the current economic issues in America is the trade deficit, which is persistent and in most years growing. The U.S. had a slight trade surplus in the early 1980s, but since then has had a trade deficit. The deficit was growing through the mid-2000s and while it is still quite large, the straight downward trend in the trade deficit has flatlined (Trading Economics, 2014). The U.S. still has the world's largest current account deficit -- by a factor of nearly four (CIA World Factbook, 2014). Petroleum products account for a substantial portion of this, as much as 10%, but the development of fracking has reduced the percentage that oil contributes to the trade deficit, and has helped the trade deficit to flatline (U.S. Census Bureau, 2014). The major import partners are China (19%), Canada (14.1%), Mexico (12%) and Japan (6.4%). Of these, Canada and Mexico are not major contributors to the trade deficit as they are major export partners as well. China, which has the second-largest trade surplus in the world, is the major source of the trade deficit, larger even than the impact of petroleum.

Impacts

There are several impacts to the trade deficit. The trade deficit does provide some benefits. As per Ricardian theory of international trade, a trade deficit reflects an increase in the availability of goods, either breadth, depth or just at a lower price, reflecting the comparative advantages of the countries involved. This is why the U.S. has entered into a large number of trade agreements, in order to spur more trade and reap these benefits even more than the country already does (Amadeo, 2014).

But there are a number of negative impacts to having such a large trade deficit. First, when we consider the GDP accounting identity, net imports is a drag on total GDP for the country. While net exports boost GDP, net imports reduce GDP. This means that a negative trade balance is a net outflow of capital from the country to its trade partners. It is not hard to see the effects of this -- in the U.S. factories are closing while in China manufacturing is a booming business. Real wages in the U.S. are stagnant since 1980, while real incomes in the developing world continue to rise. This is not to argue in favor of protectionism, but these correlations are not coincidental.

Many economists have echoed these concerns. Krugman argued that the trade deficit fuels U.S. debt, which eventually will need to be repaid. Bernanke is also concerned that running such a large and persistent trade deficit will be harmful to the economy -- any given trade deficit is not a problem, but a massive, persistent one is. Mankiw notes that the trade deficit is a symptom of consumer spending, or put another way, a lack of saving. This may be why the trade deficit has declined in the post-recession world. It also means that the lack of saving will have impacts that maybe will not be seen immediately. Croke, Kamin and Leduc noted that many other countries have had financial crises sparked by a sudden uptick in concern about trade deficits. While obviously this is not going to happen as readily with the U.S. As it has with, say, Southeast Asia, it is still a risk factor for the U.S. economy, because the trade deficit has been sustained so long (FRB SF, 2007).

Stakeholder Analysis

Most stakeholders would benefit from a diminishment of the trade deficit. The benefits -- cheaper and more goods -- are moot given that Americans are already massive consumers. Saving ten more cents on stapler adds very little value to the U.S. economy at this point, so there are few incremental gains to doubling down on the policies that have encouraged this deficit. At this point, pulling back a bit will not cause substantial harm to U.S. consumers or businesses. It will create more jobs domestically, which will have a long-run benefit. Furthermore, the economy as a whole will be at lower risk. If savings rates and real wages increase, Americans will be wealthier, even if they have to postpone that stapler purchase another week. Some importer will definitely suffer, but they have lived well for thirty years -- sorry, but nobody is going to lose sleep if the Waltons make a few less dollars this year.

The market will be affected somewhat, but these tactics are likely not sufficient to eliminate the trade deficit. It has taken three and a half decades to get to this point with the trade deficit, so it will take some time to reverse the trend. But by starting with policies to increase savings and domestic manufacturing, the trend can start to be revered, and by setting this course perhaps companies will be forced to start thinking about how they want to respond to a world where cheap foreign goods are no longer the top priority of our economic policy.