The US Trade Deficit - Essay Example

Number: U.S. TRADE DEFICIT An indication from an economic theory reveals that there is no problem with a trade deficit; the situation recovers on its own. However, the U.S. economy has had a growing trade deficit over the recent past, few decades. This observation has caused the economists to worry concerning the U.S. economy. The implication is that a lot of money, in U.S. dollar is currently maintained in the hands of foreign nations; such nations, therefore, have the potential to decide when and how to sell. A huge increase of selling dollar can potentially drive the currency value down, therefore, making a dollar more costly while purchasing imports. Deficit refers to a situation where liabilities tend to exceed assets, imports exceed exports expenditures exceed income, or losses exceed revenues (profits). Trade has undergone evolution and is currently defined as the cost incurred by companies, individuals and government agencies over the products produced in foreign countries annually. To complete the computation, the value of the expenses incurred by foreign entities is also deducted; such costs on foreign entities arise from domestic products. Many countries, if not all, they rarely import similar amount of products they export; this underperformance leads to an imbalance in trade. A deficit emerges when imports are more when compared to exports. The variance between imports and exports a given country, referred to as the balance of trade tend to differ from one business cycle to another, as well as across various economies. Regarding the specific nations where economic growth is determined by exports such as industrial goods, oil, as well as other naturally derived resources, such countries balance of trade moves positively in attaining a surplus during an expansion in the economy. The cause for such a situation is that that such countries tend to host export products, yet in demand, in periods of economic growth, at a higher rate compared to the rate at which it imports products. In the United States, imports refer to goods and services (commodities) produced in another country and purchased by the residence of America - domestic residents. Additionally, imports cover every commodity that is shipped into the United States even though it has been produced by a company owned by America. When a given product crosses the U.S. customs, yet the intended market for it is in America it is, therefore, considered an import. Further, imports refer to services which was produced in a foreign land, yet found their way to the U.S. residents. Following the above definition, imports thus cover the services bought by residents from the States while they traveled in a foreign land. Notably, according to the U.S. economic principles, a traveler refers to anyone in America for not more than twelve months. This covers purchases of foodstuff, lodging, gifts and recreation when an American travels overseas. Additionally, imports cover fares, travel, as well as additional passenger transportation hired during the travel. More services considered as imports incorporate payment of license fees, royalties, and costs to be paid over services including education, telecommunications, or advertising. In summary, when the consumer of a given product or service is an American, and on the other hand, the commodity provider is comes from a foreign country, then such a commodity is considered an import. On the other hand, an export refers to goods that pass via customs from the United States in order to find its market in foreign countries. Exports include shipped merchandise from a company based in the U.S. in order to reach such a company’s affiliate or branch in foreign lands. Additionally, an export refers to services paid for to a U.S. resident by a resident from a foreign country. Notably, the BEA approximates service exports and imports from other reports and benchmark surveys. The transactions of goods originate from the Census from America. The noted long-term deteriorating trend in America’s trade balance has been due to the persistent barriers to trade abroad, and as the falling competitiveness of the American producers. The long-term deteriorating performance calls either for a constant dollar depreciation or alternatively slower economic growth in America in comparison to other partners of trading. Such a strategy would help avoid a consistent rise in trade deficits. Elsewhere, there has been a surge in short-term, due to the following two factors; an increase in the dollar (in terms of its value) and lagged growth in partners of trade. The situation has of late been intervened into by financial and macroeconomic policies of the United States, the IMF, as well as the governments of America’s key trading partners. Deficit of the current account of America is at risk of getting into an economic “vicious circle,” since the funds borrowed in order to finance the mere deficit causes growth in the U.S. international debt. Additionally, the interest payments essential for servicing the growing debt of foreigners are emerging a substantial negative element in the balance of the country’s current account. According to the projection outflows of net interest, to be enormous by 2005 comparing to the commodities trade deficit in 1998, assuming that the current trends persist. In the large context, the bled of free financial markets, real interest rates that are considerably high, and volatility of finances overseas has significantly drawn extensive inflows of capital in America. All these factors have eventually caused the dollar to rise in value and making the U.S. commodities less competitive in price, than they would sell otherwise. Consequently, the tilt in policies of the economy to the preferences of the financial arena has, therefore, disadvantaged various producers of services, tradable manufactures, as well as products of agricultural activities in the U.S. The recent positive progression in the mark of the U.S. trade presents much reason for concern. However, it is significant noting that as the GDP’s percentage, the present trade balance indicates to be operating at the same level with the 1980s; operates at about 2.5%. One may be therefore be interested in knowing more about the overall performance of the trade balance. Notably, it is substantial to differentiate between the trade of balance’s structural component and short term component. Structural component emerges from long-term behaviors in relative growth and competitiveness, while the component of short term component indicates links to historical and cyclical fluctuations in relative growth rates and exchange rates. Following the above argument, it is true that there has been a constant improvement in the structural component (balance) since the United States has been bridging the cost gap coexisting between the States and other nations whose economies have really thrived. Therefore, despite the substantial variances in America’s trade deficit for the last ten years, the performance has actually portrayed stability. On the other hand, the fluctuations can be identified back to progressions in the U.S’s relative growth rate, most significantly to the effects of import boosting regarding the sustained expansion which began in 1992. The substantial reason of decline in the long term is a decline in the U.S. terms of trade. In contrast to the argument presented by the “conventional economic theory,” the nation’s terms of trade tend to be under the regulation of the real costs regarding the tradable goods in comparison to the goods traded by trading partners. America’s economic performance regarding the balance of trade shows that the nation has been operating almost at the same level with its immediate trading partners. The measurement of such a performance is based on the country’s relative real labor cost units, the cause for the stabilization of trade deficit. However, an absolute gap remains, and this is due t this cause, in conjunction with shorter term elements emerging from the Asian crisis and U.S. boom. These factors help in accounting for the position that there exists a trade deficit. An implication from a central policy regarding this argument holds that it is essential to observe a high rate in growth and productivity in the United States in order to turn the current disadvantage of cost into an advantage. This effort would therefore facilitate the structural trade balance conversion; from deficit to realize a surplus. According to Blecker, the overall U.S. national saving registers relatively low value since the economic roots of the 1980s, even if the observation is currently accounted for via a boom emerging from an individual consumption spending as well as a relatively lower private rate of saving instead of letting the government through its budget define policies of saving. For instance, domestic investment may act as the motive (driving force), instead of saving. Consequently, a boom in investment could cause a trade balance to deteriorate, while leading to higher demand over imports. As an attempt to address the problem of the deficit of trade, various measures should be put in place. In order to maintain a healthy productivity growth, approximately 2% per annum in average, and natural rise in the population of adults in the States, which is approximately 1%, the U.S. economy must register a growth at approximately 3% annually — given that no more adults will quit searching for job altogether. While a stronger economic growth draws immigration and at the same time motivates idle adults in reentering the labor market, growth rate of approximately 3.5% is called for in order to maintain a full economy of employment. According to economic finding of the 2011 economic performance, business investment, consumer spending, as well as auto sales contributed substantially to growth and demand. Additionally, the U.S. exports performed as well, although higher prices on oil as well as subsidized manufactures from China into the markets of the United States shot up the sustainability and trade deficit offset the then positive economic trends. Presidents Obama and Bush have strived to manipulate Chinese policies via negotiations, although Beijing presents only token gestures while cultivates support from the U.S. political arena amongst the multinational producers in China. Beijing also sought the interventions by large financial institutions while seeking for potential businesses. As a corrective measure, the United States ought to impose a tax duty over the conversion of dollar-yuan complying with the value equal to the currency market intervention by China. Such an activity would help in neutralizing the currency subsidies exercised by China on its products. This would also help America counteract against China’s attempt of stealing US jobs and factories. The mentioned taxation value would be rested in the hands of Beijing —given that the attempt eliminated and reduced the intervention by currency market, consequently the tax would fall or even disappear. Notably, the tax would cease to be protectionism; instead, in light of the mercantilism and manipulation of the virulent Chinese currency, the tax would turn out to be as self defense. Subdividing the trade deficit of the U.S. via conversion, domestic energy and by exercising the offset of the Chinese subsidies on exchange rate, would help in increasing Gross Domestic Product to realize a range of approximately $525bn annually, and help in a consequent creation of more than five million jobs. Work Cited: Blecker, A Robert, Ph.D. (1999). “The Causes of The U.S. Trade Deficit.” Accessed 4 April. 2012. http://nw08.american.edu/~blecker/policy/TradeDeficitStatement.pdf Shaikh, M Anwar. “Explaining The U.S. Trade Deficit.” Accessed 4 April. 2012. http://homepage.newschool.edu/~AShaikh/UStrdef.pdf “Trade Deficit Data Belies U.S. Recovery.” Accessed 4 April. 2012. http://www.forbes.com/sites/michaelpento/2012/02/15/trade-deficit-data-belies-u-s-recovery/ Morici, Peter. “Curb U.S. Trade Deficit; Rev up Oil to Engineer More Growth Jibs.” Accessed 4 April. 2012. http://economyincrisis.org/content/curb-us-trade-deficit-rev-up-oil-to-engineer-more-growth-and-jobs Read More