The US Trade Deficit

The US Trade Deficit OUTLINE Introduction US trade deficits Causes of US trade deficits Importation of petroleum products Protectionism Remedies I. Introduction In January 13, 2012, the United States Bureau of Economic Analysis and the United States Census Bureau, through the department of Commerce, reported the total exports in November as 177.8 billion dollars and total imports as 225.6 billion dollars for the month of November 2011, resulting to a trade deficit of 47.8 billion dollars (BEA). This was an increment of approximately 4.6 billion dollars from October the same year. The value of the US trade deficit is positive when the total services and goods imported by the US exceed the total services and goods it exports. This trade deficit on the part of the US has a huge significance o the country’s economy, as the nation is among the most significant countries that engage in international trade. The main exports from the country include industrial supplies, feed and beverages, machinery and equipment, motor vehicles and parts, aircrafts and parts, non-auto consumer goods among others (BEA). Among the imports of the country, include fuel, non-fuel industrial supplies, production equipment, and machinery. The major trade nations include the European Union, Japan, Mexico, Canada, and China. II. Causes The causes of the US trade deficit lay in the importation of petroleum products and consumer products and autos (Jackson, 2011). The nation’s dependence on foreign oil products is the main driving force of the trade deficit. Importation of petroleum-related products by the US in 2010 was 252 billion dollars, higher from 188 billion dollars in 2009. Worth noting is that the number of barrels imported in these two years is about the same, but the average yearly prices of a barrel rose to 75 dollars form 57 dollars in 2009 (Pitz, 2011). Some of the petroleum-related products include natural gas, fuel oil, crude oil, and other distillates like kerosene. The other major cause of the trade deficit is the importation of consumer products. These products include clothing, furniture, household goods, drugs, and consumer electronics. The available detailed data indicate that the nation imported 253 billion dollars while exporting only 150billion dollars worth of consumer products, thus running a deficit of 103 billion dollars in 2009 (BEA). This was an increase from previous years, even despite the inflation and declining dollar. The automotive sector is also another contributor of US trade deficit, with a recorded deficit of 79 billion dollars through the importation of 160 billion dollars of auto parts, cars, and trucks while exporting only 81 billion dollars in 2009 (Jackson, 2011). Nonetheless, the US excels in exportation of services, with a recorded surplus of 148.7 billion in 2009 (US Congress, 2010). The US trade deficits are bad for the overall economy of the country. A consistent trade deficit means that the country’s budget gets finance from debts. This simply means that the US may buy more than it can produce since the other countries lend it the money. A better understanding of the scenario is to consider a party where a drinks supplier is willing to send more drinks and put the bill on your name. However, this may only continue as long as the drinks supplier is able to loan you the money and when there are no other customers. The moment the drinks supplier asks for the money owed, the party crashes. The decline of the value of the dollar also contributes to the trade deficit. Since the dollar has been declining by an average of 40% for the past five years, then it means that the US-made services and goods are approximately 40% cheaper for European and other countries, thus giving the US companies a competitive edge resulting in more exports (US Congress, 2010). Unfortunately, the recent recession has neutralized this advantage, thus the exports recoded a decline of 1.8 trillion in 2008 to 1.6 trillion in 2009, with a similar effect on the imports. Worth noting is the fact that petroleum products are priced in dollars, thus as the dollar decline the Organization of Petroleum Exporting Countries (OPEC) increment the petroleum prices to maintain revenues (Jackson, 2011). With the heavy dependence on petroleum products, the US cannot escape the trade deficit. III. Protectionism The US trade deficit has negative impacts on the competitiveness of the nation’s economy. The importations of goods and services over long periods mean that the companies in the US lose the expertise and plants for the production of those products (Pitz, 2011). Lose of competition then translates to declining standards of living and lower quality jobs. Protectionism is not really a remedy for trade deficit. Even such a high trade deficit as recorded in November 2011 will not hurt the economy if they are invested for enhancement of future US production, unless the debts are used to finance the excessive consumption behaviors. IV. Remedies From a personal perspective, there are other policy options to counter the deficit, the first being exchange rate intervention for Japan and China, the countries that maintain huge trade surplus. In addition, the G8 or G7 countries need to incorporate China into the block. The Asian financial crisis resulted from the 1994 China’s devaluation, and thus expansion of the US trade deficit (Pitz, 2011). The major Asian currencies devalued in order to counter the Chinese aggressive export promotion and exchange rate, but the US did not follow suit, thus the accumulation of the trade deficit. Another policy may be to protect the essential manufacturing sections. Despite lack of factors indicating decline in industrial production, countries like China are becoming industrial giants. The US government needs to nurture the RD and engineering sector to stay ahead of the rising Middle Eastern countries like Japan and China. Reference BEA. U.S. International Trade in Goods and Services November 2011. Retrieved on January 2, 2012, from http://www.bea.gov/newsreleases/international/trade/tradnewsrelease.htm Jackson, J. (2011). The US Trade Deficit, the Dollar, and the Price of Oil. Congressional Research Service. Darby, PA: Diane Publishing Co. Pitz, K. (2011). The U.S. Trade Deficit: A View from Europe: An Evaluation for the Trade Deficit Review Commission of the U.S. Congress. Tennessee: General Books. US Congress House of Representatives. (2010). The US Trade Deficit: Are We Trading Our Future? South Carolina: BiblioBazaar.