The trade balance for any country is the difference between the total values of its exports and imports in a given year. When a country’s total annual exports exceed its total annual imports, it is said to have a trade surplus.
Figure 8 depicts the course of U.S. exports and imports over the past half-century, demonstrating quite clearly that, although exports increased from 1995-2000, imports increased more, producing a sizeable trade deficit by the end of the decade.20
When imports exceed exports, a country has a trade deficit. Recent history has shown that the United States has recorded the largest trade deficits that the world has ever seen. In 2009, the United States measured a trade deficit of $378.6 billion ($1.6 trillion in exports minus $1.9 trillion in imports.)21 After recording relatively large trade deficits during the 1980s, U.S. trade deficits declined substantially during the first half of the 1990s. At the end of the twentieth century, however, the deficit began increasing again, and peaked in 2005. It has since slowly been reduced. As of June 2012, the U.S. has a trade deficit of 42.9 billion USD.22
Figure 9 (below) focuses more narrowly on the annual changes in the U.S. trade balance during the past half-century. It illustrates the sharp increase in the U.S. trade deficit between 1980 and 2000 in contrast with the trend of the preceding three decades (1950 to 1980).23
The U.S. Census Bureau monitors trends in foreign trade, such as historical data by product category, U.S. trade balance by country, and trade of different products by country.
Significance of the U.S. Trade Deficit. For decades, economists and citizens in the U.S. and other countries have debated the significance of trade balances. Many argue that it is better for countries to have trade surpluses— to export more than they import—than to have deficits. They believe that trade deficits are harmful for a number of reasons:
- Trade deficits are often interpreted as a sign of a nation’s economic weakness. They are said to reflect an excessive reliance on products made by others, and to result from deficiencies in the home country’s economic output. In the eyes of many labor supporters, an excess of imports over exports comes at the expense of domestic production and jobs. Some people argue that the loss of millions of manufacturing jobs in the United States over the past several decades is due to the trade deficit.
- Trade deficits represent a sacrifice of future growth. Because a nation with a trade deficit is purchasing more than it produces, investment in future growth is being traded for consumption in the present.
- Large trade deficits create an environment conducive to financial crises that could damage the U.S. economy.
U.S. Trade Deficit Review Commission:
In order to understand the nature, causes and consequences of the U.S. trade deficit, Congress established the U.S. Trade Deficit Review Commission [http://www.ustdrc.gov/] in 1998. The commission ultimately could not reach a consensus on the significance of the U.S. trade deficit nor what to do about it. Nonetheless, the Commission’s final report, “The U.S. Trade Deficit: Causes, Consequences, and Recommendations for Action,” offers valuable background material on the importance of trade to the U.S. economy and on the two main opposing perspectives on the significance of the trade deficit.
According to this view, when the United States runs a large trade deficit, foreign sellers of goods and servicesA good is a tangible item that someone has made, mined, or grown. A service is a form of work, assistance, or advice that provides something of value to someone else but does not produce a tangible item. simultaneously accumulate large amounts of U.S. dollars. These dollars cannot be spent inside their own countries, so they need to be invested somewhere. Much of this trade deficit-driven accumulation of dollars is used to purchase American stocks and bondsA certificate issued by a government or company representing a promise by the bond issuer to pay the bondholder interest in addition to the principal amount of the bond after a specified period of time. For example, a 10-year bond purchased today costs . When you “redeem” or cash in the bond after ten years, the issuer repays the principal plus interest at a rate established when the bond was issued., pieces of American companies, and other U.S. assets.
The potential for instability arises if foreign investors in U.S. assets begin to worry that a persistent trade deficit is going to make the U.S. dollar less valuable relative to currencies in other countries. If this concern prompts a lot of foreign investors to sell their U.S. assets at the same time (in the hope of reinvesting the proceeds somewhere else), then the value of the U.S. dollar could fall substantially in a short period of time.
Others doubt the importance of these risks, and counter that:
- Consumers, particularly in the United States, can enjoy a higher living standard than they would if limited to domestically produced goods and servicesA good is a tangible item that someone has made, mined, or grown. A service is a form of work, assistance, or advice that provides something of value to someone else but does not produce a tangible item.;
- Trade deficits have rarely sparked financial crises in advanced industrial countries; and
- Trade deficits can be a sign of economic strength; as imports tend to increase rapidly during times of economic growth when consumers and firms have more money to spend on foreign as well as domestic goods.
This argument is consistent with the experience of the United States during the second half of the 1990s, when a booming economy and rising employment were accompanied by record import levels and trade deficits.
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