The US Trade Deficit Essay Sample

The US trade deficit is lower than its current GDP. Data shows that in the financial year ending 2018, the country's GDP was $ 20658 trillion (Bureau of Economic Analysis, 2018). The trade deficit for the same period was $ 810 billion. A comparison of the two findings affirmed that the total value of imports is not large enough than the sum of goods and services produced in the country. In this case, the total cost of goods includes both exports and those consumed locally.

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How has the trade deficit Changed Recently? Why?

Recently, the trade deficit has indicated a slight decline. In November 2018, the monthly trade deficit fell to $49.3 billion from 55.7 billion reported in October (Cox, 2019). The change represented an 11.5% decline in the trade deficit between the two months (Cox, 2019). The fall in the volume of imports was due to intensified trade wars spearheaded by the current administration against its major trade partners such as China and members of NAFTA. The trade wars resulted in an increase in the prices of imports from those countries. As a result, the imports become less appealing to the US consumer thus resulting in a fall in their consumption. In response to the declining demand, there was a decline in the volume of imports which in turn led to a decrease in the trade deficit.

Do you expect this trend to continue?

Yes. There exists a likelihood that the US will record a declining trade deficit. The current administration has indicated its commitment towards reducing the deficit by implementing firm policies. Most of such policies have been positioned towards reducing the volume of imports from trade partners. Already, trade tariffs have been applied against certain goods in China and the president promised to extend it to other goods. President Trump also suggested 25% and 10% tariff on steel and aluminum respectively (Cox, 2019). Such a move will discourage more imports from trade partners and business people will opt for an alternative market away from American. As the volume of imports from China and other countries decreases, so is the value of the trade deficit until it reaches a point where there exists a balance in trade or surplus.

Alternatively, the trade tariffs can force US trade partners to implement policies aimed at encouraging more US exports into their markets. For example, China recently proposed to the US a 6-year import as an offer for dropping the trade tariffs. In this proposal, China will increase its annual imports of US good by a record value of $ 1 trillion until 2024 (Tausche & Sheetz, 2019). The analysis argues that such a proposal will result in a zero trade deficit by 2020. If other trade partners such as Mexico and Canada respond similarly and the US decides to drop its protectionist measures, then the trade deficit will decline gradually without controlling for the volume of imports.

Is this trade deficit a bad or good thing, why?

The current trade deficit is a good thing. It indicates that the US is practising efficient production by allocating its limited resources to those goods and services that it avails at a lower cost while importing those goods which it does not have a comparative advantage from foreign countries. A country can only have a few a comparative advantage in the production of products and services. As a result, to maintain efficient in production, it will focus exclusively on those goods which it enjoys a comparative advantage and ignore the rest. Therefore, it will record a surplus for that item which it enjoys a comparative advantage. For example, the US had a surplus balance of trade for services (Tankersley, 2018). For the country to cover the market demand for other goods, it allows for cheap imports. Since the US has a comparative advantage on a few items, its imports are less than exports. A good case of products that US import owing to its lack of comparative advantage are electronic gadgets from China. Based on the above argument, the current deficit is good for the US as it promotes efficient production.

Secondly, the trade deficit is an indication that the consumers are successful enough to purchase more of the imported goods. Therefore, the trade deficit can be associated with a growing economy as opposed to a recession. Such an argument can be affirmed by the fact that during the rise in the trade deficit, the US economy reported a low unemployment rate and higher national income (Weinstein, 2018). When the economy is growing, employment increase which in turn lead to an increased in the disposable income for consumption purposes. With an increase in citizens, the quantity demanded of consumable goods increases. As a result, more imports come into the country to meet the growing market demand. Moreover, a trade deficit makes the dollar stronger than other currency (Weinstein, 2018). As a result, the value of US goods and services increase which leads to the rise in GDP.

Describe what would happen if we implemented more trade protections (tariffs, quotas, VERs)

Implementing more trade protection will result in a decline in both imports and exports to other countries. Protectionist measures such as trade tariffs make imports costly thus reducing their market supply (Weinstein, 2018). In response to the loss of the US market, foreign business people resort to alternative markets to cover for the gap in international and in the process they create more competition for US exports. With an increase in the competition, the US goods become less appealing in the other market thus leading to a fall in quantity demanded. In the end, the volume of US export will decline owing to a fall in demand.

Implementing more trade protection triggers a possible retaliation from the US trade partners. As a result, they respond by slapping the country's export with more tariffs (Tankersley, 2018). Already, China has to implement trade tariffs on goods from the US in response to the initial trade protections. Other country's such as Canada and the UK have also threatened to execute counter protectionist means if the US proceed with their plan of placing a tariff on Steel and Aluminum. Such a move will make US goods costly in the foreign countries thus leading to a decline in their quantities.

Implementing more trade protections will affect US Manufacturing thus hindering economic growth. Many US firms rely heavily on cheap Aluminum and steel imports for production purposes. By applying more tariff, the prices of raw materials increase thus increasing the cost of production (Irvin, 2018). To maintain their production within budget constraints, the manufacturing firms will be forced to cut on the value of other factors of production such as labor or reduce the volume of output. If firms decide to cut on work, then the economy will witness an increase in unemployment. On the other hand, you are reducing the amount of output results in a decline in GDP. Therefore, Trump's move to implement more tariffs will result in loss of jobs and collapse of the industry.

References

Bureau of Economic Analysis (2018). Gross Domestic Product: Level and Change from Preceding Periods. Retrieved from http://www.bea.gov/system/files/2018-12/gdp3q18_3rd_1.pdf

Cox, J. (2019). US Trade Deficit Narrows Much More Than Expected in a Win for Trump. CNBC News. Retrieved from https://www.cnbc.com/2019/02/06/us-trade-deficit-narrows-much-more-than-expected-in-a-win-for-Trump.html

Tausche, K. & Sheetz, M. (2019). China Offers 6-year Import Boost in Trade Talks with the US: Sources. CNBC News. Retrieved from https://www.cnbc.com/2019/01/18/china-to-offer-path-to-eliminate-trade-imbalance-with-us-report-html

Tankersley, J. (2018). Trump Hates the Trade Deficit. Most Economists Don't. The New York Times. Retrieved from https://www.nytimes.com/2018/03/05/us/politics/trade-deficit-tariffs-economists-trump.html

Irwin, N. (2018). The Real Risk of Trump's Steel and Aluminum Tariffs. The New York Times. Retrieved from https://www.nytimes.com/2018/03/01/upshot/trump-tariff-steel-aluminum-explain.html

Weinstein, A. (2018). Why Trade Deficit Don't Always Mean What Trump Say They Do. Bloomberg. Retrieved from https://www.bloomberg.com/news/articles/2018-08-20/why-trade-deficits-aren-t-the-bogeyman-trump-thinks-quicktake