Understanding the Us Trade Deficit

Topics: Current account, International trade, Balance of trade Pages: 2 (690 words) Published: June 8, 2010
Understanding the US trade deficit

by Philipp Damjanovic
The US trade deficit has been a cause for much debate in recent years. Most people recognize that a trade deficit has a negative connotation, but many cannot articulate why.

US trade deficits form by far the largest chunk of the current account deficit, which is a measure of how much more Americans spend than they earn. Current account deficits have increased steadily every year since 1991, and are currently running in the region of $800 billion to $900 billion per year. Effectively, this means that as a nation every year we spend $800 to $900 billion more than we earn; we are accumulating debt at an astounding pace. This doesn't have to be a bad thing, provided the US uses the money it borrows to invest in productive assets. Unfortunately, this doesn't seem to be the case. According to financial analyst Martin Wolf, 91% of US borrowing goes to unproductive consumer spending.

It probably shouldn't come as a surprise that the US appears to be stuck in a spending rut that it can't get out of. There are a couple of factors that that are endemic to the world's economic and financial systems that propagate this pattern.

The first is the fact that for many developing countries, the US is a major driver of export-led growth. Countries such as China, Japan, Thailand, and many others rely on the vast and relatively wealthy consumer classes of the United States to buy their goods, thus helping their own economies grow rapidly. Sometimes, these nations will manipulate their currencies in order to be able to sell their goods more cheaply in the US, relative to goods manufactured here. In an ideal 'free trade' world, this kind of manipulation wouldn't exist, but we don't live in that kind of a world (far from it). As the economies of rapidly developing nations grow, their manufacturing costs should rise and their currencies should appreciate, diminishing the initial competitive advantage that they had. In a...
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