US Trade Deficit and How It Hurts the Economy

The Critical Drivers of the America's Trade Imbalance

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In 2018, the U.S. trade deficit was $621 billion according to the U.S. Census. It imported $3.1 trillion of goods and services while exporting $2.5 trillion. The deficit is higher than in 2017 when it was $552 billion. That's despite the trade war initiated by President Donald Trump. One reason is that the dollar strengthened between 2014 and 2016, according to the U.S. dollar index. It weakened a bit in 2017 but strengthened again in 2018. A strong dollar makes imports cheaper and exports more expensive.

But the deficit is less than the record $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 have announced retaliatory tariffs, hurting U.S. exports. The tariffs depressed the stock market. Analysts worry that Trump has started a trade war that will hurt international trade.

Consumer Products and Autos Drive the Trade Deficit

Consumer products and automobiles are the primary drivers of the trade deficit. In 2018, the United States imported $648 billion in drugs, televisions, clothing, and other household items. It only exported $206 billion of these consumer goods. The imbalance added $442 billion to the deficit. America imported $372 billion worth of automobiles and parts, while only exporting $159 billion. That added $214 billion to the deficit. 

Petroleum Imports Are Falling

In 2018, the United States imported $215 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. New U.S. shale oil fields have been developed to the point where there is now an oversupply.  

U.S. petroleum exports were only $153 billion. As a result, petroleum trade contributed $62 billion to the trade deficit. 

America Is a Net Exporter of Services

The United States exported more services than it imported. It exported $828 billion in services while importing only $558 billion. That created a trade surplus of $270 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:

The Primary Trading Partners

The primary 2018 U.S. trading partners are China, with a total trade of $670 billion; Canada, with $617 billion; and Mexico, with $611 billion. The trade deficit with China is $419 billion. It's responsible for 47% of the total U.S. deficit in goods. The other U.S. trading partners don't create as much of a deficit

How the Dollar's Value Affects the Trade Deficit

The dollar declined 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 $1.8 trillion in 2008 to $1.5 trillion in 2009. Imports fell from $2.3 trillion in 2007 to $1.6 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