The U.S. Trade Deficit: An International Problem

The European Union and Japan are pleading with the Bush administration to manage the growing U.S. trade deficit, which is negatively impacting their economies.

The administration says it is sympathetic to the allies’ appeals, but strongly believes that market forces will resolve the huge trade imbalance.

What is a trade deficit?

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 (and every country) would like to export more than we import, because exports represent revenue earned and imports represent income spent.

When we buy more than we sell, we borrow money to pay our bills by selling bonds. 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. Administration critics say that the U.S. is borrowing too much from foreigners who could at any time choose to stop buying.

During the third-quarter of the 2004 fiscal year, the trade deficit hit an all-time high of $164.7 billion, according to the Commerce Department.

The weakening dollar

The value of the dollar decreases as the trade deficit rises. This is because U.S. currency loses value in comparison with other world currencies when we borrow a lot from foreigners.

When the value of the dollar drops, it becomes cheaper for foreign consumers to buy American goods, so U.S. production increases to meet the increased demand. This is good news for American companies that sell goods and services overseas.

Conversely, a weak dollar means that goods from Europe and Japan are more expensive, so demand for them goes down. This hurts our allies’ economic growth. For this reason, Europe and Japan are requesting that the U.S. strengthen its currency.

Allies want Bush to act

U.S. allies are complaining that the huge U.S. trade deficit and budget deficit (the national debt) are hurting the global economy, not just the U.S. economy.

The U.S. is borrowing money from other countries to pay its trade deficit and budget deficit. The more we borrow, the weaker the dollar becomes, and the more expensive foreign goods become. U.S. allies want the Bush administration to stop the steady decline of the dollar so that their goods will remain competitive and their economies can grow.

Although Bush has not announced any formal plans to slim the trade deficit, he has promised to work with Congress to do so. But in the short term, the administration doesn’t plan on interfering with the dollar. Bush’s economists claim that once the dollar dips low enough, the demand on U.S. goods will help it rise again - naturally.

But this theory is based on the assumption that Americans will stop buying foreign goods when import prices rise. In 2004, this has not been the case. Americans have not lost their appetite for foreign products or begun to favor their domestic counterparts. According to economists, we are experiencing a lag in price changes, where foreign goods have not yet risen and domestic goods have not yet dipped as much as they will. When this happens, they say, Americans’ spending will change.

In addition, Bush has pledged to cut the budget deficit in half over the next four years. A reduced budget deficit would ease our dependence on foreign investment and strengthen the U.S. dollar. If the administration refuses to roll back the tax cuts to give the government more money to pay our national bills, then the only way to cut the deficit is to reduce government spending - on what? On everything - including education, health care, road repair, scientific research? What will it be?

After we elect our leaders, we must make sure that they make good on their promises. It will be important to pay attention to the trade deficit and budget deficit over the next four years to see if they increase or diminish. Our deficits directly impact our day to day lives, from the supermarket to the job market.

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Article Posted on: 1/4/2005