The U.S. Trade deficit: you’ve heard the term before, but do you really understand it? Here’s what it’s all about, and why it’s significant.
What Is It?
A trade deficit is a market phenomenon where the amount of goods being imported exceeds the amount of goods being exported. A trade deficit isn’t necessarily a bad thing, but it can become a negative economic force over time if not corrected.
Why Does It Matter?
Ultimately, if more goods are being imported than exported, it means that U.S. dollars are flowing out of the country, enriching foreign countries at the expense of the U.S.
With more and more U.S. dollars flowing overseas, foreign countries may choose to sell at any time. If they do, it could drive the value of the currency down, which could drive up the cost of imports further.
This cycle ultimately ends with the U.S. being reliant on imports which it can’t afford.
Exporters As Key Players
Exporters are antagonists to importing operations. Companies like ISOStainless.com export steel products, like steel bands and straps, that are used in industrial and commercial applications. This type of export helps to balance out the massive steel imports and is a positive economic force.
As more goods are exported out of the country, more foreign dollars flow in. The value of the dollar increases, making imports less expensive.
Having no imports is not necessarily a good thing. The goal is to achieve a balance – a situation where imports and exports oscillate, creating an economic balance. The dollar value remains stable, as do foreign currencies, under this scenario.
Everyone wins.
However, today’s exporting industry still generates a $67 billion trade deficit, according to a new report by the Economic Policy Institute. The report notes that, even though the U.S. is the second-largest exporter in the world, it’s also the only major exporter that has consistently run trade deficits for more than two decades.
Laws And Regulatory Solutions
One proposed solution for a trade deficit is a series of antidumping duties – fees or penalties imposed on importation of goods. These duties would make imports much more expensive, lessening or eliminating the economic benefit for companies wishing to import their goods here.
At the same time, once competition from foreign companies is reduced or eliminated, U.S. manufacturers can ramp up production and be assured of a “captive audience” for their products.
The reason antidumping is so attractive to U.S. manufacturers is because they believe that foreign countries are charging unfair or artificially low prices for goods that are being imported. And, if American companies cannot compete, they will go out of business.
Market Solutions
A market-based solution would involve reducing regulations on imports, but also on pricing schemes and domestic anti-trust laws, which would foster competition, consolidation, and better economic scaling of industry. This would reduce the cost for manufacturing, driving prices for domestic products down.
Steve Smith is an import/export investor. He enjoys writing about his trading experiences on the web. His posts can be found mostly on business and financial blog sites.
