The U.S. Trade Deficit

A recent report by the U.S. Census Bureau highlights the U.S. Trade deficit for 2010. This report is very straight-forward and shows the change in the trade balance throughout the years. As most everybody knows, the U.S. has been running a large trade deficit (i.e. they have been importing more then they export) for several years now. The report gives us a good starting point to understand where the deficit is coming from and some of the reasons behind it.

Before I can go into the reasons why the trade deficit is the way it is, I should first give some background information on it. Currently, the U.S. trade deficit sits at $497.8 billion dollars. That is almost a 40% increase from 2009! However, one thing that should be noticed is that the U.S. is actually trading services on a surplus (+$148.7 billion or a 13% surplus increase), but that just means that goods are being traded at an even larger deficit (-$646.5 billion or a 27% increase in the deficit). The scariest thing about this increase in the deficit is that it is not proportionate to the GDP growth either. In 2009, the deficit was 2.7% of U.S. GDP; but in 2010 it grew to 3.4%. I would be less worried is the percentage of deficit growth stayed the same as percentage of GDP (as that implies the deficit is needed to keep our current economy running as is), since it is growing, that shows the U.S. economy is becoming increasingly more reliant on imported goods – especially as the U.S. comes out of the recession.

There are several possible explanations for this rise in the deficit. The most obvious one being that the U.S. has been in a recession lately and has needed to import more goods in order to get out of it. I personally do not believe this because the trade deficit actually shrank in 2009: right after the recession hit.

I feel that the best reason is because of currency manipulation done by countries abroad. This chart shows how the U.S. Dollar has done compared to our three largest trade partners: Canada, China, and the Eurozone. While the Dollar has gained value on the Euro, meaning it should be importing more goods from the Eurozone in economic theory, the Eurozone actually accounted for one smallest percentage increase in the trade deficit of the three (13% compared with Canada’s 4.3%). Both of these trading zones exported mostly automobiles, oil, and pharmaceuticals to the U.S. I do not see too much information here to really read into.

China is where it gets interesting. The Chinese deficit accounted for 33% of the increased deficit and 42% of the entire deficit! Since the U.S. Dollar is down to the Chinese Yuan this year, this flies in the face of economic logic: Chinese goods are more expensive and should be imported less. I have no real explanation for what is going on here other than that the Chinese have been keeping their currency artificially low for much of the year, realizing that their economy needs U.S. imports from them in order to survive.

Another plausible explanation that I have heard is that the way of measuring GDP is flawed. Currently, GDP is given to the country that produces the good, but not where the actual revenue ends up. If it were possible to trace where revenue ended for products, I hypothesize that we would see a much different landscape for trade balances.

Regardless of the reasons behind the trade deficit, the reports showed two things conclusively. One is that the U.S. is increasingly becoming a service based society. This is shown by the larger percentage increase in services produced by the U.S. compared to goods. The other fact that is shown by the larger amounts of trade and the larger deficit as a percentage of GDP is that the U.S. is becoming even more global.