While the U.S. economy has been hailed as stellar over the past decade, the rise of the trade deficit has become a persistent topic of debate. Despite robust economic growth, unemployment is at a low level and inflation has been relatively low, many have declared the economy to be in a “new era.” In the media, the rising trade deficit is often portrayed negatively, citing unfair trade practices by foreign trading partners and a lack of competitiveness in world markets.
China and Germany have the highest trade deficits, rising by over twenty-four percent a year. Their deficits reflect a combination of agricultural, industrial, and macroeconomic policies. The U.S. trade deficit with Mexico surged after the Peso crisis in 1994. The combination of low wages and proximity to the U.S. market helped drive the rise in the U.S. deficit. Although the trend is not as strong today, it will likely continue to increase in coming years.
President Trump has been criticized for his protectionist trade policy, but his criticisms of the trade imbalance do not account for the root cause of the deficit. President Trump’s policy choices have offset the trade impact of the stimulus package, as well as pushed overall U.S. manufacturing demand and production. There are two policy choices that stand out in the history of the trade deficit, however. While he is right to point to bad trade deals, he is wrong to blame these decisions on his own trade policies.
The United States’ trade deficit with the rest of the world rose to its highest level ever in 2018, reaching $621 billion. The United States’ exports grew by 7.5 percent last year, and its imports rose by just over one percent. As a result, the U.S. has been increasing its trade deficit with the rest of the world in the last decade, even while at the same time increasing its exports. That’s a bad combination for everyone.
The economy is likely to continue expanding despite the rising trade deficit. New investment in new technologies will release pent-up demand for goods and services. Meanwhile, stimulus checks from the recovery bill will give the economy a much-needed pick-up. Meanwhile, businesses will look to import goods to increase inventories. Thus, the deficit will rise even higher. In short, the rising trade deficit is a sign that the economy is maturing.
Some experts claim that the trade deficit does not affect wages directly. However, there is a relationship between trade deficits and the real wage rate of unskilled workers. The so-called factor price equalization (FPE) effect, which makes trade less competitive, may reduce wages. The fact remains that trade deficits do not affect wages directly. While trade may impact wages, the trade deficit does not have a positive impact on wages among unskilled workers.
As a result, the United States must make efforts to improve its economic situation. Specifically, we need to improve trade relations with key countries. These include China, Japan, NAFTA countries, and Europe. The European situation is exacerbated by slow growth, while China’s national savings rate is the highest in the world. China is becoming more dependent on imports as consumers cut their spending and consume less U.S. goods and products.