No Easy Solutions for Chronic U.S. Trade Deficit

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The most recent U.S. trade deficit figures released today underscore yet again the chronic nature of the nation’s trade imbalances. After posting record trade deficits in 2005, the Census Bureau estimates released today indicate that the trade deficit amounted to $62.0 billion in March 2006, bringing the total trade deficit for the first quarter of 2006 to $196.2 billion, or a comparatively high 6% of gross domestic product (GDP) (figure 1). If the trade deficit continues at that rate for the rest of the year, the trade deficit could approach $800 billion by the end of 2006.

Several long term factors evident since March 2001 are responsible for the growing trade deficit:

  • Growing energy dependence: A growing appetite for petroleum imports, which totaled $20.0 billion in March 2006 and $65.2 billion in the first quarter, up from $26.6 billion in the first quarter of 2001, highlights the nation’s growing dependence on foreign energy sources.
  • Weaker demand for U.S. high technology exports: The Census Bureau reports a deficit of $7.2 billion in the first quarter of 2006 compared to a surplus of $4.6 billion in the first quarter of 2001.
  • Weaker demand for U.S. services: Trade in services such as education and tourism have widened the U.S. trade deficit. A surplus of $13.9 billion in the first quarter of 2006 compares to a surplus of $18.1 billion in the first quarter of 2001.
  • Growth of foreign borrowing keeps dollar high and broadens deficit: High budget deficits have forced the U.S. to borrow money overseas, which in turn has kept the dollar high. Although the dollar has fallen this year against most major currencies, its decline has been slower than otherwise would have been the case because of the budget deficit. A high value of the dollar makes U.S. exports more expensive abroad. In addition, managed exchange rates in some parts of the world, such as China, have also impeded export growth and contributed to the flood of imports.

These disparate trends illustrate the need for a multi-pronged approach to reduce the trade deficit. There is no silver bullet. Greater emphasis on energy independence, investment in innovation, attention to the declining services trade surplus, government fiscal discipline, and engagement with China on exchange rates are all key elements of this multi-pronged approach.

What’s more, action is urgently needed since delay will only drive the U.S. economy faster into massive amounts of debt. The trade deficit has continuously widened throughout this current business cycle and has exceeded 5% of gross domestic product (GDP) since the middle of 2004 (figure 1). Most economists consider trade deficits that are above this threshold unsustainable in the long run.

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Christian E. Weller is a Senior Economist at the Center for American Progress.