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trade deficit

Page history last edited by Brian D Butler 15 years, 1 month ago

 

 

Trade Deficit

 

A trade deficit occurs when a country imports more than it exports. This leads to a net outflow of a country's currency. Countries on the other side of the transaction will typically sell the importing country's currency on the open market. As supply of the country's currency increases in the global market the currency depreciates. As a net importer, the US has seen its trade deficit grow rapidly over the last decade. In 2006 the US had a record deficit of 765 billion dollars.

 

Proxy for "current account"

 

The US trade deficit — which is a good proxy for the current account balance (the income surplus offsets a transfers deficit) —

 

 

US Trade Deficit size

 

almost reached $1 trillion...in 2009...is now around $40b a month. At its peak it was more like around $60b a month. That implies, if nothing changes, the 2009 current account deficit would be around $500b, down from a peak of $700b. 

 

Benefit of Weak dollar

 weakening US dollar, which should help the US reduce its trade deficit and should help overt potential balance of payments crisis in the future (see discussion below)....

 

 

 

 

USA Balance of payments

 

 

Note that the USA has a massive current account deficit (importing more than exporting), but makes up for the balance by having a massive Capital Account surplus (more foreigners are investing in the US, so more money is coming in than is going out).   There is a massive amount of T-bills being purchased by foreign central banks (such as China, etc) that are doing so in order to keep their currency level low.  Note that China has over $1 trillion investment in the USA.  They pay for these investments with the money that they earn from trade.  Since their overall B.O.P must balance, and since they have a massive current account surplus, then they must also have a massive Capital account deficit.  So, the money must be invested overseas.

 

The USA model = keep a current account deficit, and finance the gap with foreign investments.  This has worked well for the US over the past 30 years.  Should countries such as Mexico do the same thing?  Is this a model for success for others to follow?  Not necessarily.  This "business model" only works as long as foreigners have a very high level of confidence in your currency.  If they loose confidence in your stability, or growth, then they will no longer demand your investments, and the model breaks down.   Warning to the USA:  don't do things to destroy foreign confidence in your country.  If you loose that advantage, then you will loose your capital account surplus.  If you loose the capital account surplus, then you will also loose your ability to run a current account deficit, ending imports. 

 

Can the USA continue running such a large current account deficit?

 

There is a lot of debate in this area.  The key is "confidence". As long as the world continues to show confidence in the US, then it will continue to be desirable for foreign investment.  Foreigners will want to purchase US treasury bonds because they are seen as "risk free investments". 

 

As China and India continue to open up their economies, they will need to meet the pent-up demand of their citizens to invest money out of the countries.  Much of this investment will likely go to the USA (as long as confidence remains high).  With this happening, it is possible that the US could run a current account deficit for the next 30+ years (as they have done for the past 30 years) without much problem.  As it currently stands, Indian and Chinese consumers have very limited ability to invest overseas.  Some economists predict that as their economies open up, that we should see increased demand for US investments.   As long as the US is able to run a capital account surplus, then they should have no trouble maintaining the current account deficit.  This balance should be fed by India / China for many years to come.

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