2006-03-13 at 9:54:00 am #14782
Breaking Down the Deficit
What you should know about the biggest trade gap in U.S. history — and how it affects your wallet
t’s hard not to be impressed — even a little startled — by the January trade deficit announced by the Commerce Dept. on Mar. 9. At $68.5 billion, it was larger than expected — in fact, the largest ever. The deficit piled up at a rate of:
$2.2 billion a day
$92 million an hour
and $250,000 a second.
Here are answers to some frequently asked questions about the trade gap.
What exactly is the trade deficit?
The trade deficit is simply the gap between imports into the U.S. and exports from the U.S. Imports are bigger, so there’s a deficit. Included in the figures are both goods, such as autos, and services, like banking and tourism.
Who wins and who loses from the trade deficit?
In the U.S., consumers win and workers lose. Consumers get cheap products and services from around the globe. Workers, though, may lose their jobs because their employers can’t compete with the influx of lower-priced goods and services from abroad. Also, demand for U.S. exports might dry up if they’re not competitive in the global market. Of course, most Americans are both consumers and workers, so they feel both the upside and the downside.
How much bigger was the deficit than expected?
It was at least $2 billion larger than most expectations. Exports rose 2.5%, but imports rose even more (3.5%) because the U.S. economy is growing strongly and both consumers and businesses are spending heavily.
Why is the trade deficit so big?
There are two schools of thought on this. The pessimists say Americans are living beyond their means. The optimists argue that the rest of the world sees the U.S. as a great place to invest, and the only way they can accumulate the dollars they need to invest in America is to export more to the U.S. than they import from the U.S.
Who’s right about the deficit — the pessimists or the optimists?
Hard to say. But the optimists have one piece of evidence in their favor. So far, the value of the dollar has remained remarkably strong. That means that there’s still plenty of demand for dollars in world markets. To put it differently, the U.S. isn’t having to stage a fire sale to raise money.
How does the trade deficit affect the U.S. economy?
As a rule, it subtracts from economic growth. That’s because Americans are buying stuff from overseas instead of having it “Made in the U.S.A.”
Should I try to buy more domestically made items to do my bit for the economy?
Trouble is, a lot of the things that are imported aren’t available in sufficient quantities from U.S. suppliers. Oil, for one. Clothing. Toys. Besides, it’s not always sensible for consumers to insist on domestically made goods if it’s more efficient to have them made abroad. In any case, most forecasters say the U.S. economy is fundamentally strong and is likely to grow at an annual rate of 4% to 5% in the first quarter.
Is the trade deficit sustainable?
Not forever. Foreigners have been accumulating mountains of paper IOUs — stocks, bonds, and the like — from the U.S. in exchange for goods and services. At some point they’ll want to cash in those IOUs for something more usable, like wheat or software or a family trip to the Grand Canyon. At that point the U.S. might not need to run a surplus, but it would at least have to run a deficit that’s much smaller as a share of economic output.
What is the ideal situation: Surplus or deficit?
Economists have long agreed that there is nothing inherently wrong with a trade deficit, any more than there is something wrong with a family going into debt to buy a house.
So, why the worry about the deficit?
The disaster scenario is a crisis of confidence among global investors that triggers massive selling of the dollar. The greenback would tumble. The Federal Reserve would have to jack up interest rates to stem the dollar’s losses. That would cause the economy to slow drastically, drying up demand for imports. Inflation would rise because imports would become more expensive. The milder and more likely scenario is a much more gradual adjustment that would slowly dampen U.S. consumer spending while creating more jobs.