US Trade Deficit Rises to Highest Monthly Level Since 2006
The U.S. monthly trade deficit increased by 5.9% to $67.1 billion in August. This was the highest monthly level since August 2006, when it was $68.2 billion. That's a worrying sign for U.S. businesses and job growth since it means that U.S. imports increased more than exports.
Both exports and imports have dropped since the COVID-19 pandemic, but exports have fallen more. Exports are down almost 18% since February 2020, while imports dropped 3%.
Annual Trade Deficit
In 2019, the U.S. trade deficit was $576.9 billion, according to the U.S. Bureau of Economic Analysis (BEA). The U.S. imported $3.1 trillion of goods and services while exporting $2.5 trillion.
The deficit is lower than in 2018 when it was $579.9 billion. One reason is that the dollar strengthened between 2018 and 2020. A strong dollar makes imports cheaper and exports more expensive.
While large, the deficit is still less than the record of $763.5 billion in 2006.
- Long-term trade deficits hurt the economy.
- A strong dollar increases the deficit by raising export prices.
- Consumer products imports are the primary driver of the U.S. trade deficit.
- The U.S. exports more services than it imports.
What Creates the U.S. Trade Deficit?
Consumer products are the primary drivers of the trade deficit. In 2019, the U.S. imported $653.9 billion in consumer goods, while only exporting $206.3 billion. That created a $447.6 billion deficit.
Automobile trade created half of that consumer product deficit. The U.S. imported $376.1 billion in cars, trucks, and their parts. It only exported $161.8 billion, creating a $214.3 billion deficit.
In 2019, the U.S. 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, the lowest on record.
America Is a Net Exporter of Services
In 2019, U.S. exports of services were $875.8 billion. That exceeded its imports of $588.4 billion. That created a trade surplus of $287.4 billion. This means U.S. services are very competitive in the global market. The surplus helps offset the deficit in goods.
The biggest contributor to the surplus was travel-related services, at $193.3 billion in exports. Other big contributors were:
- Other business services: $189.4 billion
- Financial services: $135.7 billion
- Intellectual property: $117.4 billion
The Primary Trading Partners
The U.S. has a $610.4 billion deficit with its top five trading partners:
|Country||Deficit (in billions)|
How the Dollar's Value Affects the Trade Deficit
The dollar declined against the euro from 2001 through 2007. This meant that U.S. goods and services were cheaper for Europeans. That made U.S. companies more competitive, increasing exports.
The 2008 recession offset this advantage, causing global trade to decline. 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 through 2020. That's hurt exports.
Keep in mind that oil is priced in dollars. As the dollar declines, the Organization of Petroleum Exporting Countries (OPEC) increases prices to maintain its revenue. 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 U.S. 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.
Another 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 their expertise and even the factories to make those products. Just try finding a pair of shoes made in the U.S. As the nation loses its competitiveness, it outsources more jobs, and its standard of living declines.
U.S. Bureau of Economic Analysis. "International Trade in Goods and Services," Download Table "U.S. Trade in Goods and Services, 1960-Present." Accessed Oct. 6, 2020.
U.S. Bureau of Economic Analysis. "U.S. International Trade in Goods and Services, August 2020." Accessed Oct. 6, 2020.
U.S. Census Bureau. "Exhibit 1. U.S. International Trade in Goods and Services." Accessed Oct. 6, 2020.
Federal Reserve Bank of St. Louis. "Trade Weighted U.S. Dollar Index: Broad, Goods and Services." Accessed Oct. 6, 2020.
U.S. Census Bureau. "Annual 2019 Press Highlights." Accessed Oct. 6, 2020.
U.S. Census Bureau. "Exhibit 3. U.S. Exports of Services by Major Category." Accessed Oct. 6 2020.
U.S. Census Bureau. "Top Trading Partners - December 2019." Accessed Oct. 6, 2020.
Federal Reserve Bank of St. Louis. "Trade Weighted U.S. Dollar Index: Broad, Goods (DISCONTINUED)." Accessed Oct. 6, 2020.
Economic Policy Institute. "U.S. Trade Deficits Causes, Consequences, and Policy Implications." Accessed Oct. 6, 2020.