The US Trade Deficit
It has been a turbulent year for major stock market indices. There were wide fluctuations as both economists and common investors speculated how recently announced tariffs on aluminum and steel exports would affect the domestic and global economies.
Reasoning for the tariffs
These tariffs are being considered to theoretically reduce the significance of trade imbalances that the U.S. maintains with other countries. The prevailing thought is that these extra fees for importing American goods and services would end up generating more capital to be infused in the domestic economy.
This information, in conjunction with President Trump’s willingness to engage in “trade wars” with countries that export more goods to the U.S. than they import, is making many individuals ask: What is a trade deficit, and what does it mean to the domestic economy?
What is the trade deficit?
A trade imbalance is when a country imports more goods and services than it exports. Though trade imbalances are measured in value rather than quantity, the two can be correlated. A trade deficit can occur for a number of reasons, including a shortfall of domestic assets to satisfy consumer demands and a population that has enough disposable income to buy discretionary international goods and services.
A brief history of the domestic trade deficit
The U.S. has incurred consistent trade deficits nearly every year since the middle of the 1970s. The margin of these trade deficits, however, have exponentially increased since the early 2000s. At that point, there was an increase in government borrowing to fund ever-growing national expense requirements. The increase in demand of materials to fill these needs led to a greater amount of imports than exports.
Is the trade deficit bad for the American economy?
Determining whether a trade deficit is “good” or “bad” depends on many factors, including personal fiscal ideology and the health of both the domestic and global economies. For many economists, exporting more during a recession is preferable in order to increase international demand and value for domestic goods and services. In an expansion, however, importing goods may be more preferable, as it keeps prices relatively low and fosters economic activity.
The aforementioned is evidenced by examining the trade deficit breakdowns of the last 10 years. The trade deficit has shrunk in times of economic hardship — such as following the 2008 recession — because there is less financial flexibility to spend on imported goods.
There are those who are incredibly concerned about what the long-term trade deficits mean for the domestic economy. Some financial professionals believe that long periods of sustained deficits will result in an over reliance on borrowing, which could have myriad negative consequences.
Economists are skeptical about whether amassing significant trade deficits will cease anytime soon. Though job growth has been strong for the last few years and unemployment is at nearly historic lows, it is unclear what the prospects are for strong domestic growth in physical production. Though the current, long-running bull market may be losing its momentum, it has certainly been a prosperous rise since the depths of the recession.