Trade Deficit: Not Just for Economists Anymore

The Commerce Department announced that the U.S. is importing far more than it’s exporting, causing a record trade deficit in March 2004. The month saw $45.96 billion go to imports that was not made up in exports, and when this information was made public on the morning of May 12, 2004, stock indexes and the dollar to fell sharply, though both somewhat recovered by mid afternoon that day.

The trade deficit has more lasting effects as well. Most economists consider it a measure of our global economic health. At its most basic, the trade deficit is a gauge of how much the U.S. is buying from abroad compared with how much it is selling abroad. Ideally, we’d like to export more than we import, because exports represent revenue earned and imports represent capital spent.

When we buy more than we sell, we depend heavily on foreigners to buy U.S. Treasury bonds and other securities; in effect, we are consuming beyond our means and borrowing the difference. Some say this is an economically sound practice as long as the U.S. remains attractive to foreign investors.

The Bush administration maintains that the trade deficit is not a serious threat because the U.S. remains a vibrant, free economy that will continue to attract investment. By contrast, Democratic hopeful John Kerry is concerned that the U.S. is borrowing too much from foreigners.

Cause of the record trade deficit

March’s massive trade deficit has been attributed to at least three major factors: oil, foreign autos, and electronic gadgets.

Rising oil prices are likely the most significant factor, according to The Wall Street Journal. Imports of petroleum products accounted for 26 percent of the overall rise in imports. In March, the U.S. imported $13.8 billion in petroleum, up from $12.2 billion in February.

Foreign cars and electronics were also in high demand, a factor that shocked experts since such items are growing more expensive as the trade deficit increases.

The weakening dollar

The value of the dollar decreases as the trade deficit rises. Logically, U.S. currency loses value in comparison with other world currencies when we borrow a lot from foreigners. A lower dollar makes imported goods more expensive than domestic products. In turn, U.S. consumers gradually switch to American-made products, which then lessens the trade deficit. For the dependence on foreign investment to diminish, the dollar needs to fall even further. But a weak dollar means a lower standard of living, since foreign products will be more expensive.

A brighter outlook

Some experts say that the U.S. economic picture is brighter than it seems. In a recent BusinessWeek article, Laura D’Andrea Tyson, dean of the London Business School, said that the trade deficit is misleading because it ignores revenue generated by companies that are largely American but have operations overseas - U.S.-based multinationals.

Tyson explained that these multinationals account for 25 percent of the United States’ national income, called the Gross Domestic Product or GDP. Further, 77 percent of U.S. multinational’s production, 80 percent of their global spending, and 74 percent of their global employment occurs in the U.S. Tyson suggests that trade statistics overlook these facts.

Tyson cites Rebecca McCaughrin, a Morgan Stanley economist, who has tracked the sales of U.S.-based multinationals’ foreign affiliates and compared them with total U.S. exports. According to McCaughrin, foreign affiliates’ global sales are about three times as large as total U.S. exports. In other words, foreign operations that are set up by multinationals to serve foreign markets outsell domestic operations designed to do the same thing. And it makes sense: manufacturing widgets in the U.S. to export to, say, Spain, is often less efficient than manufacturing widgets in Madrid to sell to Spain.

Tyson argues that these foreign affiliates’ sales should be included in trade statistics. Incorporating such data would greatly reduce the trade deficit figures, she said.

Not just for economists

The trade deficit clearly affects our day-to-day lives. If the trade deficit widens and paints a grim U.S. economic climate, stocks fall. If the dollar plunges, imports, like oil, get even more expensive and upset our personal budgets.

Understanding economic concepts and philosophies is essential to choosing the right candidate. For a discussion of Bush and Kerry on the economy, click here. For an explanation of their tax plans, click here.

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Article Posted on: 6/8/2004