Trade Deficit Essay

Length: 3 pages Sources: 5 Subject: Economics Type: Essay Paper: #10511094 Related Topics: Fracking, International Trade, World Trade Organization, Petroleum
Excerpt from Essay :

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....

...

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,…

Sources Used in Documents:

References

Amadeo, K. (2014). Trade deficit: Definition, causes, effects, role in BoP. About.com. Retrieved November 30, 2014 from http://useconomy.about.com/od/glossary/g/Trade_Deficit.htm

CIA World Factbook: United States. (2014). Retrieved November 30, 2014 from https://www.cia.gov/library/publications/the-world-factbook/geos/us.html

FRB SF. (2007). Is the U.S. trade deficit a problem? What is the link between the trade deficit and exchange rates? Federal Reserve Bank of San Francisco. Retrieved November 30, 2014 from http://www.frbsf.org/education/publications/doctor-econ/2007/june/trade-deficit-exchange-rate

Trading Economics. (2014). United States balance of trade. TradingEconomics. Retrieved November 30, 2014 from http://www.tradingeconomics.com/united-states/balance-of-trade
US Census Bureau. (2014). Comparison of nominal and real imports of petroleum. U.S. Census Bureau. Retrieved November 30, 2014 from http://www.census.gov/foreign-trade/statistics/graphs/PetroleumImports.html


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