U.S. Trade Deficit Has Been

U.S. trade deficit has been a growing concern for the U.S. economy over the last couple of years. Starting from a capital-related definition of the trade deficit, we can state that the U.S.

trade deficit is a result of "a net inflow of capital to the United States from the rest of the world." According to this source, this is a result of both the attractiveness of the American assets on the global market and a low savings rate in the U.S., able to finance all the investment opportunities that appear. However, the discussion of the U.S. trade deficit needs to be taken beyond the simple issue of capital inflow.

Indeed, one of the most important causes of the mounting trading deficit is given by the constantly ascending trend of the national aggregate demand. Basically, as economists have put it, "U.S. economy spends more than it produces." This type of excessive spending leads to the necessity of massive product and services imports in order to cover aggregate demand. Corroborated, the consistent capital inflow and the significant import of product and services is the most important cause of the U.S. trade deficit.

Aggregate demand is also stimulate by consumer debt. Indeed, a flexible financial sector, with flexible crediting policies and rates encourages individual debt and, further more, individual spending. Certainly, there are also punctual causes of the U.S. trade deficit, depending on the various macroeconomic policies taken at different times. A strong dollar, for example, encouraged a massive import rather than internal production and exports, widening the trade deficit.

High interest rates, at the same time, take the trade deficit level higher, because investors will be more interested in purchasing financial assets in the U.S., due to a higher return. This increases the capital inflow. The federal budget deficit is indirectly connected with the U.S. trade deficit. In practice, the federal budget deficit is equivalent to governmental spending that surpassed the governmental income.

This means that the government invests heavily in educational programs, medical care, infrastructure etc., measures which indirectly stimulate the economy, increase the individual income and spending, as well as the aggregate demand. This, in turn, further stimulates a massive intake of products and services, widening the trade deficit. It is important to note that, despite the fact that U.S. trade deficit has sometimes been associated with low U.S. products and services competitiveness on global markets, this is most likely not the case.

According to some critics, this would lead to decreases in export level, encouraging greater levels for the trade deficit. However, the industrial production has surged in the last decades, as well as the exported services in the global markets (American service providers are important players on the market), so we cannot consider a decrease in competitiveness as a cause for increased U.S. trade deficits. Without proper financial and macroeconomic policies, we are not likely to see any changes in the U.S. trade account in the near future.

Despite a devaluated dollar all throughout 2007 and good parts of 2006, the trade account deficit has remained an important problem of the U.S. administration. Bibliography 1. Griswold, Daniel. The Causes and Consequences of the U.S. Trade Deficit. Testimonybefore the Senate Finance Committee Washington, DC June 11, 1998. On the Internet at http://www.cato.org/testimony/ct-dg061198.html.Last retrieved on June 29, 2007 2. Elwell Craig. The U.S. Trade Deficit: Causes, Consequences, and Cures. Congressional Research Service ".