U.S. Trade Deficit
The US has been running the significant trade deficit over the last four decades. As a result, the country is the biggest debtor in the world with almost $3 trillion net debt. Obviously, this situation raises concerns among many researchers and policymakers, as they suggest that the long-run trade and current account deficits might make devastating effect on the growth performance. Actually, the issue is quite controversial and debatable: for example, other researches claim, that trade deficit is merely the result of the effective re-allocation of resources in the global economy and there is no consequences, nor positive nor negative, for the economic growth and development. Finding an appropriate answer to this problem is crucial, because it would determine the future vector of the trade policy. Therefore, the aim of this paper is to analyze causes and consequences of the US trade deficit and, considering results of the research, give recommendations regarding the issue.
Thus, in the mid-70s the US trade surplus turned into deficit that boosted during 80s and 90s and has been constantly on increase since that time: the country started to import more and export less. Moreover, the US has always supported the idea of the free trade and absence of any barriers among countries. Therefore, the trade policy (e.g. import restrictions, export subsidies etc.) could not explain the movements in the country trade balance.
Actually, researches determine three primary sources of the increasing US trade deficit. The first reason is the significant decrease in savings, as the percentage of GDP, since 1950s that occurred primarily due to decline in federal and personal saving, rather than local and corporate. The second reason is business cycles, that affect both imports and exports, and the third reason is the increase in investment attractiveness of the US. Actually, the trade deficit positively correlates to the business cycles: increases with periods of economic expansions and decreases during recessions.
Consequently, the US has been running the long-term account deficit that include not only trade flows, but also flows of capitals and transfers. Current account balance is determined as the difference between aggregate savings and aggregate investments:
CA = S – I;
This means that the demand for investments in the US had been higher than the supply for the savings. Indeed, fluctuations in trade, associated with changes in demand and supply, could not cause long-term current account deficit. Decrease in saving (in other words domestic supply of investment) encouraged the interest rate to increase, thus increasing attractiveness of the US assets. Then, as interest parity suggest, increase in domestic rates lead to appreciation of the domestic currency. In addition, the increase in consumption (C) increased has been higher than the fall in domestic investments (I), therefore aggregate demand curve shifted to the right.
The US dollar appreciation plus increase in equilibrium price has made combined pressure on the prices of US exports (↑) and imports (↓), boosting the trade deficit.
Thus, what factors has caused these changes? As the Figure 1 suggest the first significant divergence occurred in the period started in early 80s until early 90s. Though, both investment and saving decreased, the latter decline was higher. Researchers associate this with significant budget deficits and low private savings. The same situation has occurred in early 2000s.
Figure 1. US saving, investments and NCO, 1950-2011.
Actually, there is no single opinion regarding the reasons of decline in private saving. Some suggest that this is a result of high yields on investment in property and corporate stocks, that accelerated the increase in consumption. Another reason is that elderly, who receive majority of Medicare and Social payments, have fewer incentives to save and more to spend. Moreover, developing credit products also contributed to facilitation and increase in consumption.
The periods 1992-2000s and early 2000s-2007 characterized by both increase in saving and the higher growth in investment, that is associated with information technology boom in 1990s and increase in investment attractiveness of US in 200os, probably at the contrast to the Latin America and East Asia countries that were experiencing significant recessions.
Thus, the conclusion is that trade deficit is not the result of the US and its trade partners’ policies, but the relation between domestic saving and investment. Different reasons contributed to the long-term decrease in savings that encouraged the constant trade deficit since mid-70s. Notably, that there are two types of combination of saving and investment dynamics that contributed to the trade deficit: first, significant decrease in saving plus moderate decrease in investments; and second, increase in savings and higher increase in investments. Intuitively, the latter situation is more favorable, because it had accompanied periods of economic booms in the US (early 90s and early 2000s-2007).
Consequences of trade deficit
Many researches converge in the opinion that trade deficit has no significant or slight positive effect on the US economy. Thus, Arnold (2000) suggested that the deficit make a little positive effect on GDP and wages, but almost insignificant effect on GNP. The increase in GDP and wages occurs because of capital inflows encourages the domestic investment increase either as long as labor productivity. As GNP accounts the interest paid on US assets to foreign investors, the effect is more moderate, and whether it is positive or negative would depend on several factors, such as use of foreign funds (consumption or investment, and relative gains from the inflows and costs paid on these capitals). The same conclusion has been made by Gould and Ruffin (1996) that treated the trade deficit as the result of reallocations of funds in the world.
Conclusions & Recommendations
Thus, the analysis show that the trade deficit in the US has been caused by long-term processes of simultaneous decrease in savings, increase in interest rates and investments and appreciation of the national currency. That led to the relative expensiveness of the export and cheapness of imports, and trade deficit in general. The effects of these processes is a debatable question, but many researchers suggest that there are no serious issues that require significant policy responses, especially regarding the trade policy. Thus, as long as the gains from capital inflows are higher than interests paid out, there would unlikely any devastating effects on the economic growth.
Reference list:
Could, David M., Ruffin Roy J. “Trade Deficits: Causes and Consequences”. Federal Reserve Bank of Dallas, (1996).
Arnold, Bruce, “Causes and Consequences of the Trade Deficit: an overview”. CBO, Washington D.C. (2000).
