United States Trade Deficit Essay

Published: 2020-04-22 08:25:15
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A trade deficit occurs when a country is importing more goods and services than it is exporting. For instance, in the first half of 2004, the United States (US) recorded an aggregate trade deficit of $575. 5 billion, with the US imports accounting for 51% larger than the US exports (Scott, 2004). 2. What are the primary reasons for the United States (US) trade deficit? Scott (2004) noted that the main reasons for the US trade deficit include: (1) Significant increase in the value of petroleum imports. The volume of petroleum imports registered a 6. 5%-annual increase in 2004, coupled with the dramatic increase in the petroleum price by 14.

8%. The growing consumption level of petroleum products notwithstanding the rising petroleum prices denotes inelasticity of petroleum demand to substantial price increases. (2) Rapid decline in international competitiveness of the manufacturing sector. The US deficits with China, Western Europe, Pacific Rim and other newly industrializing economies, reflect the strong export performance of these foreign countries relative to the weaker US domestic manufacturing industries. In particular, the US has the largest trade deficit with China among other countries; such that, the US exports to China are about one-fifth of the US imports from China.

The US deficit on manufactured goods rose by 16%, from $216 billion in 2003 to $252 in the first half of 2004. The percentage of the merchandise deficit to the US gross domestic product surged up to 5. 3% in the second quarter of 2004. Between 1997 and 2003, the manufacturing sector lost 3. 3 million jobs. Even with 91,000 jobs that have been generated in the manufacturing industry since 2004, the manufacturing trade deficit has continued to deteriorate. To offset the declining international competitiveness, a strong growth in domestic manufacturing demand is needed.

Particularly, the US needs a huge increase in its domestic manufacturing output by 18%. 3. How does a falling dollar impact the trade deficit? A falling dollar will make the US exports cheaper. This will boost foreign demand for the US exports and increase production of goods that will eventually help reduce the trade deficit. For instance, the 30%-reduction in dollar from 1985 to 1988 was necessary to achieve a 1%-share of trade deficit to US GDP by 1989 (Scott, 2004). The dollar was maintained at that level through 1997 to keep a 1%-share of trade deficit to GDP (Scott, 2004).

As the dollar started to climb and peaked in 2002, the US trade deficits worsen (Scott, 2004). The 9. 7% annual decline of the US dollar since 2002 has yet to lower the trade deficit as Asian governments intervened to keep the dollar value artificially high, among others (Scott, 2004). This had expanded the trade gap, instead of minimizing the gap. On the other hand, a weaker dollar makes the US imports more expensive. This will shoot up consumer spending on imports and will worsen the trade deficit, unless the domestic manufacturing industries are highly competitive. 4. Does the U. S. run a trade deficit in goods, services, or both?

The US runs a trade deficit in goods only. As shown on the US trade balance table, the trade deficits in goods registered an increase by 15. 3% in the first half of 2004 (Scott, 2004). Meanwhile, the trade on services registered a surplus and has improved by 12% in the first half of 2004 compared with the trade surplus in services in the first half of 2003 (Scott, 2004).

Work Cited

Scott, Robert E. Soaring imports of oil and Chinese goods drive trade deficit to new record. Trade Picture. 13 August 2004. Economic Policy Institute. 27 April 2008 .

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