How the US Trade Deficit Hurts the Economy

multiethnic women shopping
Personal consumption fuels U.S. imports. Photo: Peathegee Inc/Getty Images

In 2016, the total U.S. trade deficit was $502 billion. That's because it imported $2.712 trillion of goods and services while exporting $2.209 trillion. The deficit is higher than in 2013 when it was $478 billion. That's because the dollar strengthened 25 percent in 2014 and 2015.

But the deficit is less than the record $762 billion in 2006. The decrease since then means U.S. exports are growing faster than imports.

That's good for U.S. businesses and job growth. 

Consumer Products and Autos Drive the Trade Deficit

Consumer products and automobiles are the primary drivers of the trade deficit. In 2016, the United States imported $584 billion in generic drugs, televisions, clothing and other household items. It only exported $194 billion, adding $397 billion to the deficit. America imported $350 billion worth of automobiles and parts, while only exporting $150 billion. That added $200 billion to the deficit. 

Petroleum Imports Are Falling

In 2016, the United States imported $144 billion in petroleum products. That includes crude oilnatural gas, fuel oil and other petroleum-based distillates such as kerosene. That was a lot lower than the record $313 billion imported in 2012.  That's because new U.S. shale oil fields have been developed to the point where there is now an oversupply.  

U.S. petroleum exports were only $81 billion.

That means petroleum trade contributes $73 billion to the trade deficit. 

America Is a Net Exporter of Services

The United States exported more services than it imported.  It exported $750 billion in services while importing only $502  billion. That created a trade surplus of $248 billion. It means U.S. services are very competitive in the global market.

This surplus helps offset the deficit in goods.

Here's how much each category contributed to the trade surplus in services.

The Primary Trading Partners

The primary U.S. trading partners are China ($579 billion total trade), Canada ($545 billion), Mexico ($525 billion). The trade deficit with China is $347 billion. It's responsible for 70 percent of the total U.S. deficit in goods. The other U.S. trading partners don't create much of a deficit

Why an Ongoing Trade Deficit Weakens the Economy

An ongoing trade deficit is detrimental to the nation’s economy because it is financed with debt. The United States can buy more than it makes because it borrows from its trading partners. It's like a party where the pizza place is willing to keep sending you pizzas and putting it on your tab. This can only continue as long as the pizzeria trusts you to repay the loan. One day, the lending countries could decide to ask America to repay the debt. On that day, the party is over.

How Changes in the Dollar's Value Affects the Trade Deficit

The dollar declined 40 percent against the euro from 2001 through 2007. This meant that U.S. goods and services were 40 percent cheaper for Europeans. That made U.S. companies more competitive, increasing exports.

The recession offset this advantage, causing global trade to decline. U.S. exports dropped from $1.8 trillion in 2008 to $1.5 trillion in 2009. Imports fell from $2.3 trillion in 2007 to $1.6 in 2009. Both exports and imports have risen since then. This is despite the continued strength of the dollar since 2009, due to the weakening effect of the eurozone crisis on the euro.

But the dollar's long-term value is constantly pressured downward by the U.S. debt. Furthermore, oil is priced in dollars. As the dollar declines, OPEC increases prices to maintain its revenue.

The U.S. reliance on oil means it will be difficult to escape its trade deficit.

The United States Could Be Losing Its Competitiveness

A third concern about the trade deficit is the statement it makes about the competitiveness of the U.S. economy itself. By purchasing goods overseas for a long enough period of time, U.S. companies lose the expertise and even the factories to make those products. Just try finding a pair of shoes made in the America. As the United States loses competitiveness, it outsources more jobs, and its standard of living declines. (Source: "U.S.  International Trade in Goods and Services," U.S. Census Bureau, February 7, 2017.)

How the U.S. Trade Deficit Is Part of the Balance of Payments

What Is the Balance of Payments?

  1. Current Account
  2. Capital Account
  3. Financial Account