What Does a Trade Deficit Mean?

Whether it is the regular or the business news, whenever trade talks or general economic news come up, the term "trade deficit" inevitably follows. The US has run a trade deficit every year for more than 30 years now, with the problem steadily growing every year. The end result has been fewer jobs, lost opportunities for a stronger economy, huge debt, and a problematic dependence on foreign oil imports.

Identification

A trade deficit is the phrase used to describe a negative balance of trade. This occurs when the monetary value of a country's imports exceed that of its exports.

Misconceptions

Various factors go into considering a country's balance of trade, or the balance between its exports and imports. It is not simply a matter of products, such much as foodstuffs or manufactured goods. Matters such as services, capital investment, foreign borrowing, and commodities such as oil or natural gas are also considered when determining a balance of trade.

Considerations

An added complication to the balance of trade (and trade deficits) is the value of a given country's currency. For example, if the US dollar is weak, in theory that make US exports cheaper and more competitive. As a result, the sale of more US goods, as well as an overall increas in exports occurs. Thus, even though exports increase, the dollar experiences less purchasing power for imports, such as oil.

Warning

It is generally believed that running a trade deficit in the long term is damaging to a nation's economy. In particular, a high trade deficit is generally linked to a drag on economic growth, employment, and savings. The United States has had a systemic trade deficit since the late 1970s, and has had particularly large bilateral deficits with Japan and China.

Benefits

There are counter-arguments that trade deficits are irrelevant, or perhaps even beneficial. This is often phrased in terms of comparative advantage. For example, dollars spent on Chinese textiles and cheap electronics often return to the United States in the form of investment in American companies, and/or the purchase of foodstuffs and high technology value-added manufactures. However, this tends to ignore that a substantial amount of those dollars held by the Chinese (to continue the example) also return to the United States to finance American borrowing and indebtedness, which is generally not economically productive.

Size

The US typically has run a trade deficit every year since 1976. These deficits were typically under $150 billion/year until the late 1990s, and they spiked dramatically during the George W. Bush administration. The all-time high was 2006, with a balance of payments deficit of $753 billion. This spike has been due largely to the systemic budget deficits run by the Bush administration (resulting in increased foreign borrowing) and the rising price of oil.

Expert Insight

$600 billion+ trade deficits have only been possible because of the use of the US dollar as the "world currency," or reserve currency of choice. However, the record weakness of the dollar in 2007-08 caused many multi-national corporations, private banks, and even national treasuries to switch from the dollar to the Euro or a broad basket of currencies. It is unclear how long the US can continue to sustain such gargantuan trade deficits without suffering severely damaging economic consequences.

Resources

• US Foreign Trade Deficit Statistics