How large is the US trade deficit (relative to GDP)?
As at August of 2015, the United States trade deficit stood at $48 billion, up by $6 billion from $42billion in July. Therefore, this indicates an increase of approximately 16% in a month’s time (Bureau of Economic Analysis, n.d). Economists define the gross domestic product as the total value of the goods and services produced within a country’s jurisdiction less the value of the goods and services used up in production and then adjusted for inflation (Erceg, Guerrieri, & Gust, 2005). In the United States, the GDP rose at the rate of 4% in the first quarter of the current year. Usually, the GDP is measured quarterly and in the first quarter of the year 2015 it grew by approximately $33 billion. In the second quarter, the GDP was recorded at $17,914billion (Bureau of Economic Analysis, n.d). In short, the statistics above indicates an increase of 6.1% or approximately $264 billion.
How has the trade deficit changed recently and why?
The United States trade deficit has persisted since the early1970s due to high imports of crude oil and consumer products (Hunt, & Rebucci, 2005). Recently the US trade deficit was a result of international trade with, Japan, China, and Germany. The trade deficit has changed from $44 billion in June 2015 to $42 billion in July 2015 to $48 billion in August 2015 (Bureau of Economic Analysis, n.d). The following is a table that provides the information regarding the US trade deficit in the current year.
|2015-08-05||Jun||$ -44B||$ -41B(R)||$ -46B|
|2015-09-03||Jul||$ -42B||$ -45B||$ -41B|
|2015-10-06||Aug||$ -48B||$ -42B||$ -44B|
|2015-11-04||Sep||$ -48B||$ -45B|
The rise in the trade deficit was a result of a fall in exports to its lowest since October 2012 caused by a strong dollar and weak external demand. Imports increased by approximately1.3% due to high demand for consumer goods in the US market. Precisely, imports increased from $3 billion to $233 billion. On the other hand, the consumer goods increased by $4 billion; telecommunication gadgets and other household goods increased by $2 billion; other electronics products increased by $0.3 billion that means the total increase of consumer goods increased by $3 billion to $192 billion. Similarly, import of services increased by $0.3 billion: traveling having $0.2 billion and transport fares by $0.1 billion.
Total exports decreased by $4 billion to $185.1 billion. Therefore, the value of the exports of goods decreased to $125 billion: fuel oil decreased by $0.6 billion; industrial supplies and materials decreased by $2.2 billion; plastic material decreased by $0.2 billion, and crude oil decreased by $0.2 billion (Bureau of Economic Analysis, n.d). Export services increased by $0.4 billion to $60.6 billion, led by financial services up to $0.1 billion, and then traveling for all purposes by $0.1 billion. Sales to the European Union fell by $0.5 billion, imports from China increased by 3% and exports to Mexico fell by $1.5 billion (Bureau of Economic Analysis, n.d). However, it means that the trade deficit has increased because its exports have decreased while its imports from China have increased massively.
In a nutshell, the reason for this was the increase in exports, acceleration in personal consumption expenditure and an increase in state and local government spending. Moreover, it also involved a reduction in imports and acceleration in nonresidential fixed investment. However, they were partly offset by a decrease in private inventory investment and federal government spending.
Do you expect this trend to continue?
The trend is expected to continue as projected in the table provided by this paper but at a declining rate. Since the trade, the gap has lessened by 7% to $44 billion which is small since February. The forecast was revised to $45.7 billion in October. Data ranging from consumer spending to employment and housing have suggested the economy has maintained its momentum from the second quarter. Similarly, the economy was on solid footing when global financial markets were rocked by the turbulence triggered by worries over China’s economy. There is an increase in exports by 0.4% to $188.5 billion but due to the strong dollar it has remained constrained (Bureau of Economic Analysis, n.d). On the other hand, there is a fall in imports by 1.1% to $230.4 billion, but imports in motor vehicles will increase while those of food will fall. There is a decline in exports to China, Canada, Brazil and the European region.
Is this trade deficit a bad thing or a good thing, and why?
There are two sides to this situation. First, trade deficits are not a bad thing since it signals that the US dollar is desired. Our current situation can be resolved since China is planning to devalue its currency. There will also be an increased foreign ownership of assets and increased foreign investment. Also, the current method of calculating the trade deficit does not adequately account for income derived from foreign sources or the United States ownership of foreign stocks. On the other side, the sustained trade deficit will hurt the future generations. Sometimes the GDP can be affected by massive deficits.
Describe what would happen if we implemented more trade protection
The first thing that the United States can do is eradicate currency exploitation that has been done by China, Japan, and Singapore. If it does so the undervalued Asian currency relative to the United States currency will reduce the trade deficit by up to $190 billion thus increasing US net exports (Scully, G. W. (2014). The United States can also increase import tax especially for goods from China which will increase its prices thus try to bring favorable terms, but this can also cause other countries to retaliate. The imposition of quotas will discourage the exporting countries from exporting more than what it has been agreed upon therefore the US government can budget ahead (Konings, & Vandenbussche, 2008). When the government imposes import quotas, it will help the domestic industries to grow since the amounts of imports have been restricted.
Lastly, the government can decide to place a Voluntary Export Restraints (VERs). Such type of trade barrier is created by an exporting country and it is always voluntary. Similarly, the importing country will also accompany the levy by a reciprocal VER. Therefore, when the US government decides to use VERs, the prices of the goods will increase but the domestic industries will be protected.
Bureau of Economic Analysis. (n.d). Retrieved from http://www.bea.gov/international/index.htm
Erceg, C. J., Guerrieri, L., & Gust, C. (2005). Expansionary fiscal shocks and the us trade deficit. International Finance, 8(3), 363-397.
Hunt, B., & Rebucci, A. (2005). The US Dollar and the Trade Deficit: What Accounts for the Late 1990s?. International Finance, 8(3), 399-434.
Konings, J., & Vandenbussche, H. (2008). Heterogeneous responses of firms to trade protection. Journal of International Economics, 76(2), 371-383.
Scully, G. W. (2014). Constitutional environments and economic growth. Princeton University Press.
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