Current political talks are focused on the impending trade deficit our country continues to run. Both candidates for the presidency have argued for ways in which they intend to bring balance to the economy. The United States has been running a consistent trade deficit with its trading partners since the 1970s (Budget of the, 2012). The Great Recession (2008-2012) saw huge deficits that are continuing to worry American citizens. Many Americans are asking the government to find a way to balance the federal budget. However, not all believe that trade deficits are bad for the economy.
In fact, some would argue that growing trade deficits are showing that the economy is growing alongside income levels (Markheim,2010). The following will explore the balance of trade history while looking at contributing factors as well as observing important trade partners for the United States. The United States has traditionally run stagnant trade surplus/deficits up until the 1970s. The only exception was during World War II. During the war the U. S. was importing goods at high rates as most of the work force was fighting overseas. The U. S. egan running a trade deficit in 1971 and has continued to do so, with the exception of 1975, until today (Balance on goods, 2012). The cause for the deficit in the 1970s can be attributed to a number of factors (e. g. oil prices, value of U. S. dollar). Most notably, the United States experienced large price changes in oil as a result of the oil crisis’. The U. S. reached peak oil production in the early 1970s which caused U. S. oil exports to decrease dramatically. This began the downward trend that would continue well into the 21st century (Bernheim, 1988).
Along with volatile oil prices, the United States also began running budget deficits under President Ronald Reagan in 1982. He continued these budget deficits throughout his presidency which would prove to have a profound effect on the economy (Bernheim, 1988). Also, during this time the European and Japanese industrial infrastructures were finally catching up with the United States. Their efficiencies in production lowered their prices causing citizens to buy more imported goods. Moreover, countries such as China and Mexico began to manufacture sophisticated products with considerably lower labor costs.
Their productivity levels were becoming on par with the United States while their wages remained far below the U. S. rates (Blecker, 1999). Year| Value| Surplus/Deficit| 1960| 3. 508| Surplus| 1965| 4. 664| Surplus| 1970| 2. 254| Surplus| 1975| 12. 404| Surplus| 1980| -19. 407| Deficit| 1985| -121. 880| Deficit| 1990| -80. 864| Deficit| 1995| -96. 384| Deficit| 2000| -376. 749| Deficit| 2005| -708. 624| Deficit| 2010| -494. 737| Deficit| Figure 1 The early 1990s saw steady increases in trade deficits as a result of continued increases in imported goods.
During the late 1990s, there were large capital inflows as a result of the internet boom. The inflows caused the U. S. dollar to appreciate, encouraging imports. This is an interesting period as there was an apparent budget surplus occurring concurrently with the trade deficit (Blecker, 1999). In most recent years, the country has seen a huge upward trend on imported goods from likes of China and several other developing economies—most which consist of manufactured goods and foreign oil (U. S. trade overview, 2011). Most of these countries are continuing to produce goods at a much lower price than domestic goods.
One of the bigger issues involved here is the need for China and other Asian countries to allow their currencies to appreciate in value. The stronger Yuan would likely make Chinese exports more expensive and would encourage more competition domestically (Economic growth detoured, 2012). Some experts have viewed the trade deficit as a developing issue. Economist Paul Krugman suggests that America will be able to run these trade deficits because foreigners are willing to finance our expenditures. However, one day easy credit will come to an end, and the United States will have to find a way to finance its own economy (Krugman, 005). Alternatively, economist Greg Mankiw sees the trade deficit as only a symptom of the greater issue. He claims the real issue is low national saving. For the deficit to disappear, domestic investment would have to lower to levels on par with national saving. To fix the deficit issue, the country will need to lower its imports while increasing levels of national saving (Mankiw, 2006). Some of the U. S’s biggest trade partners mentioned previously include China, Canada, Mexico, Japan, Germany, the United Kingdom, France, South Korea, India, and Brazil.
The top four of these are Canada, China, Mexico, and Japan. China and Japan import a large percentage of America’s manufactured goods (i. e. electrical equipment, toys, games, etc. ) while Canada and Mexico are some of the largest suppliers of crude oil and petroleum products (“Us-china trade statistics”, 2012). Canada and Mexico are big importers of car parts and accessories as well (Canada’s Top, 2010) (Mexico’s Top, 2010). It is apparent that America has become heavily dependent on foreign imports. Particularly, in the past 10 years the country has seen unbelievable trade deficits.
Although there are adverse opinions, one thing can be said for sure—America is obsessed with foreign goods. If the government wants to fix the deficits, they need to focus on balancing the trade equation by increasing savings while incentivizing domestic spending. Citations Bernheim, B. (1988). Budget deficits and the balance of trade. National Bureau of Economic Research, 2, 1-32. Retrieved from http://www. nber. org/chapters/c10935. pdf Blecker, R. (1999). The causes of u. s. trade deficit. Retrieved from http://nw08. american. edu/~blecker/policy/TradeDeficitStatement. pdf
Department of Commerce, International Trade Administration. (2011). U. s. trade overview. Retrieved from Office of Trade and Industry Information website: http://www. trade. gov/mas/ian/build/groups/public/@tg_ian/documents/webcontent/tg_ia n_002065. pdf Federal Reserve Bank of St. Louis, (2012). Balance on goods and services (bopgbs). Retrieved from website: http://research. stlouisfed. org/fred2/series/BOPBGSA Krugman, P. (2005). Bad for the country. New York Times, Mankiw, G. (2006). Is the u. s. trade deficit a problem?. Greg Mankiw’s Blog, Retrieved from http://gregmankiw. blogspot. com/2006/03/is-us-trade-deficit-problem. tml Markheim, D. (2010, January 12). [Web log message]. Retrieved from http://blog. heritage. org/2010/01/12/growing-trade-deficit-good-news-for-u-s- economy/ Office of Management and Budget, (2012). Budget of the u. s. government. Retrieved from U. S. Federal Government website: http://www. whitehouse. gov/omb/ Us-china trade statistics and china’s world trade statistics. (2012). Retrieved from https://www. uschina. org/statistics/tradetable. html (2012). Economic growth detoured by deficit. Wall Street Grand, Retrieved from http://www. wallstreetgrand. com/economicgrowthdeficit. html