US Trade Deficit and How It Hurts the Economy

The Critical Drivers of the America's Trade Imbalance

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In 2019, the U.S. trade deficit was $616.8 billion according to the U.S. Bureau of Economic Analysis and the U.S. Census. The U.S. imported $3.12 trillion of goods and services while exporting $2.5 trillion. The deficit is lower than in 2018 when it was $627.7 billion. One reason is the trade war initiated by President Donald Trump. Another reason is that the dollar strengthened between 2014 and 2016. It weakened in 2017 but strengthened again in 2018 through 2019. A strong dollar makes imports cheaper and exports more expensive.

The deficit is less than the record of $762 billion in 2006. The decrease since then means U.S. exports grew faster than imports. That's good for U.S. businesses and job growth. 

Trump's protectionist measures include a 25% tariff on steel imports and a 10% tariff on aluminum. China, the European Union, Mexico, and Canada announced retaliatory tariffs, hurting U.S. exports. The tariffs depressed the stock market. Analysts worried that Trump's trade war hurt international trade.

Key Takeaways

  • Long-term trade deficits hurt the economy. It drives debt, which demands payment sometime in the future. Deficits also allow countries to lose their manufacturing or service competitiveness.
  • The strength of the dollar influences the trade balance. A strong dollar may increase the deficit by raising prices of exports. Conversely, a weak dollar may decrease a deficit by lowering export prices.
  • Importing of consumer products is the primary driver of the United States' trade deficit.
  • It is in the service category where the United States exports more than it imports.  

Consumer Products Drive the Trade Deficit

Consumer products, especially automobiles, are the primary drivers of the trade deficit. In 2019, the United States imported $654 billion in consumer goods, while only exporting $206 billion. That created a $448 billion deficit.

Automobile trade created half of that consumer products deficit. The United States imported $376 billion in cars, trucks, and their parts. It only exported $162 billion, creating a $214 billion deficit.

Petroleum Deficit Lowest Since 1998

In 2019, the United States exported $180.2 billion of petroleum. That includes crude oil, natural gas, fuel oil, and other petroleum-based distillates such as kerosene. New U.S. shale oil fields have been developed to the point where there is now an oversupply.  

The 2019 petroleum deficit was $13.7 billion. That was the lowest since 1998 when it was $42.8 billion.

America Is a Net Exporter of Services

The United States exported more services than it imported. It exported $847 billion in services while importing only $597 billion.  That created a trade surplus of $250 billion. It means U.S. services are very competitive in the global market. The surplus helps offset the deficit in goods.

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

  • Intellectual property, royalties, and license fees -- $129 billion.
  • Travel-related services and transport -- $306 billion.
  • Computers and other business services -- $228 billion.
  • Financial and insurance services -- $131 billion. 

The Primary Trading Partners

The United States has a $610 billion deficit with its top five trading partners:  

Country Deficit (in billions)
China $346
Mexico $102
Japan   $69
Germany   $67
Canada   $27
TOTAL TOP 5 $610

How the Dollar's Value Affects the Trade Deficit

The dollar declined by 40% against the euro from 2001 through 2007. This meant that U.S. goods and services were 40% 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 $1.3 trillion in 2008 to $1.1 trillion in 2009. Imports fell from $1.96 trillion in 2007 to $1.56 trillion in 2009. Both exports and imports have risen since then. This was despite the continued strength of the dollar since 2009, due to the eurozone crisis weakening of the euro. The dollar briefly weakened in 2017 but strengthened in 2018. That hurt exports.

Keep in mind that oil is priced in dollars. As the dollar declines, the Organization of Petroleum Exporting Countries increases prices to maintain its revenue. The U.S. reliance on oil means it will be difficult to escape its trade deficit.

Two Ways the Trade Deficit Hurts the U.S. 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.

A second 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, U.S. companies lose the expertise and even the factories to make those products. Just try finding a pair of shoes made in America. As the United States loses competitiveness, it outsources more jobs and its standard of living declines. 

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

Article Sources

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  2. U.S. Census Bureau. "Annual Trade Highlights." Accessed Dec. 13, 2019.

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  4. Economic Synopses. "The U.S. Consumption Boom and Trade Deficit." Page 1. Accessed Dec. 13, 2019. 

  5. U.S. Customs and Border Patrol. "Section 232 Tariffs on Aluminum and Steel." Accessed Dec. 13, 2019.

  6. Office of the United States Trade Representative. "United States Announces Deal With Canada and Mexico to Lift Retaliatory Tariffs." Accessed Dec. 13, 2019.

  7. U.S. Census Bureau. "Annual 2019 Press Highlights," Accessed Dec. 13, 2019.

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  9. U.S. Census Bureau. "Exhibit 4. U.S. Imports of Services by Major Category." Accessed Feb. 5, 2020.

  10. The United States Census Bureau. "Top Trading Partners - December 2019," Accessed Feb. 5, 2020.

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  12. Office of the United States Trade Representative. "Mexico, U.S.-Mexico Trade Facts." Accessed Dec. 13, 2019.

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  14. Economic Policy Institute. "U.S. Trade Deficits Causes, Consequences, and Policy Implications." Accessed Dec. 13, 2019.