The Trade Deficit
KYLE FREDERIKSEN
11/10/2011
Even from the time when America was a colony of Great Britain they still had a system
in place where they would trade with Great Britain. That system of mercantilism, in which a
protectorate country trades exclusively with its mother country, was abolished after the end of
the Revolutionary War but the United States of America never stopped trading to other countries
from that point on. Unfortunately today the United States has relied on foreign trade to the point
where they are currently in a trading deficit which means they are importing more goods from
other countries more than they are exporting goods to those same countries. This issue has been
in the forefront of many debates due to the correlation that the trade deficit has with the
economy. Jobs inside the United States are created when there is a high demand for products,
but the problem occurs when there is a demand for products that are produced in other countries
like China and India. With a decrease in the demand for US made products owners of companies
will not produce as much since they do not want to have unsold inventory that yields no money
to them. This will then result in workers getting laid off because the company owners do not
want to pay for workers that are producing goods that are not being bought. Presidents and
Congress have been trying to solve this issue for decades but due to the large deficit the US has
accumulated any progress does not do make any dents in the ever increasing deficit.
The issue starts with the labor laws that are in place in other countries. They are less
rigorous than the laws that the United States has so the cost of production in other countries like
China is much lower and thus cheaper for owners of companies. The Bureau of Labor Statistics
(BLS) makes lists of the hourly compensation rates of US laborers and laborers in other
countries, they cannot make an accurate prediction though for China due to the fact that the BLS
cannot find enough substantial data. They did hire a Chinese-based consultant though who did
do some researching to better predict the hourly compensation of workers and she came up with
the figure of 64 cents per hour in the year of 2002. These 64 cents represent not only direct
wages, but they also represent benefits and social insurances that employees receive from their
hiring company. The US in comparison had an hourly compensation of $21.11, a difference of
$20.47 (Coy). This statistic shows that it is much cheaper to do business in China and explains
why American businesses choose to do business in China instead of the United States. The
United States will then import goods that are made in China due to the fact that they are so
cheap. Last year the United States imported $364.9 billion from China alone while only
exporting $91.9 billion, creating a trade deficit of $273 billion with China alone. The United
States is China’s number one trading partner and destination of exports while China is the
number four import destination of US goods, number one being Japan (see graphs at end of
document). This discrepancy with China over the past years makes up for a majority of the
trading deficit that the US has accumulated.
The United States did not always have a trade deficit though, for the majority of its
history it has maintained a trade surplus with other countries. It was not until the year of 1976
that the United began its extended years of a trade deficit that it is still in the middle of today
(McEachern). The trade deficit as a percentage of the gross domestic product (GDP) has been in
the range of about 4% except in the years of 1991 where the deficit fell to 1.3% and in 2006
when the deficit rose to a peak of 6.3% (McEachern). The president during the year of 1976
when the trade deficit first began was Gerald Ford; the President that took office after Nixon
resigned due to Watergate, in 1991 George H.W. Bush was President, and in 2006 his son
George W. Bush was in office. Each of them had their own idea of how to deal with foreign
trading and that is what led to the trade balance of the United States. Gerald Ford came into
office during a time of stagflation, a period of high prices and low output, which was not helped
by the United States’ involvement in the Vietnam War. This lower level of output also led to
higher levels of unemployment since companies were not running at maximum efficiency.
Gerald Ford’s biggest fight against foreign products came when he proposed a “tariff on
imported oil, the end of price controls on domestic oil, and a new tax on domestic oil producers.”
A price control is a price that is put in place by the federal government in order to prevent the
overcharging of products during a recession. Ford hoped that these would help stimulate the
production of domestic oil through lower prices in the long run from an increased supply of oil,
however the Democratic Congress did not agree with the conservative ideas of Ford. Eventually
they came to the agreement of a 12% price decrease on domestic oil and the elimination of price
controls in 40 months (American President: A Reference Resource). Although this did improve
the economy a little bit it was not enough the stop the trade balance from becoming a deficit.
Another major factor that contributed to the trade deficit was the oil embargo and crop failures of
1973. OPEC cut down its oil supply, thus decreasing the aggregate supply of oil to the US which
will increase prices on average and also decrease the amount of output in the United States which
leads to a decreased amount of exports.
The closest that a president has gotten to creating a trade surplus in a year is when
George H.W. Bush had a deficit of 1.3% when compared to the total GDP. Bush was a
Republican like Ford and he told his voters that there would be no new taxes while he was in
office. He had to go back on what he said though because he believed that raising taxes would
help solve the federal budget deficit. If the federal budget was fixed then he believed that the
trade deficit would also be repaired in the process. On November 5th, 1990 Bush signed the
Omnibus Budget Reconciliation Act which had $140 billion in new taxes for the next five years.
These new taxes helped decrease the federal budget and also decrease the demand for people to
buy products which decreased the amounts of imports that the United States shipped in during
the term of George H. W. Bush. Another issue that was prevalent during this time was the Cold
War. The Cold War increased the fear of Soviets and Chinese which also decreased the demand
of goods that were made in those countries, which would also decrease the amount of imports
into the United States. Unfortunately though, this decrease in the trade deficit did not last for
long, increasing until it peaked in 2006 under the presidency of George H.W. Bush’s son,
George W. Bush (American President: A Reference Resource).
George Bush had a record level of trade deficit but his administration also increased the
amount of exports by 13%. The problem was created though due to the increasing need for
foreign oil from OPEC and foreign goods from countries like China. Bush believed in increasing
exports rather than trying to find ways to lower the amount of imports. The Democratic
Congress though did not agree with the ideas of Bush and wanted to open markets to American
products and increase the competition of American products in those markets. This
disagreement led to a tension between the executive and legislative branches which resulted in
fewer bills getting passed. The rising unemployment and increased demand for foreign oil led to
the biggest trade deficit as a percentage of GDP.
President Barack Obama ran on the platform that he would double American exports in
five years which he believed would increase the number of American jobs by two million. In his
first two years exports dropped by .3% although imports decreased 1.7% which lowered the trade
deficit by $2.6 billion (Crutsinger). On September 8, 2011 Obama made an address to Congress
where he asked Congress to pass a bill that he believed would help decrease the trade deficit.
The bill called for tax cuts in the range of $450 billion so that people would have more money in
their pocket and businesses would receive tax cuts for employing more employees which, Obama
believed would help stimulate the economy (Landler). Obama is a proponent of buying
American products in order to help stimulate the economy and also decrease the amount of
imports in the same process. His opponent in the 2008 election race, John McCain, recently
stated that he wants to create a free-trade agreement with three countries: Panama, South Korea,
and Panama. He believes that the agricultural aspect of the United States would be able to
increase exports by $27 billion. He also believes in giving American companies that are
overseas a tax holiday in order to entice them to bring their business back to America
(McDaniel). A tax holiday is a break, or a holiday, from having to pay taxes. President Obama
signed free trade agreements with those three countries on October 21, 2011. The predominant
Republican Congress supported the agreement but in general it does not agree with Obama’s
trading policy. Ironically though, the Republicans in Congress were the most eager to get the
agreements signed due to the fact that it wanted Obama to move on to other agreements with
other countries so American business would not lose out to foreign businesses. The agreement
with South Korea was the biggest of three due to the fact that South Korea is the United States’
seventh-largest trading partner, it is estimated that the deal with help support 70,000 American
jobs. It is predicted that American exports will increase by $10 billion to South Korea while
another $1 billion of exports could be sent to Colombia due to the removal of high costing tariffs
to ship goods to their country. Also it will also remove tariffs that American businessmen have
to pay for their products which will decrease the cost of imports (Abrams).
Mitt Romney is a Republican that is currently running for the candidacy of the
Republican Party for the 2012 presidential election. He is a believer that President Obama is not
being tough enough towards China. The driving force behind Romney’s trade policy is to force
China to either open its markets and stop determining the value of its own currency or have the
United States close its open door to China. Mitt Romney believes that the key to allowing the
United States to close its trade deficit is to hold China accountable for its manufacturing
practices which are increasing the value of American imports by 40%. He believes that the
amount of trading that the United States does with China should be the main focus, followed by
opening trade with other countries to allow more exposure for American goods (Esch).
The proposals made by President Obama are meant to affect the demand side of
economics. That means that he believes that an increase in aggregate demand will be the key to
solving the trade deficit. His tax cuts to businesses and employees would give them more money
in their pockets to work with; this would cause the aggregate demand of consumers to increase
because consumers would be more willing to purchase products. Using an aggregate demand
and supply model it is possible to determine the equilibrium point where the price of goods that a
company is willing to sell at would be the same as the price that consumers would pay for that
same amount of goods. When aggregate demand increase though the demand curve shifts to the
right, resulting in an increase in the real GDP or the GDP based on a constant purchasing power
and an increase in prices for the most part. The increased output is a result of consumers having
more money to spend on goods, thus giving companies more money in the process. The
companies then can use the money to hire more employees or purchase better technology which
would increase the amount of goods that they could produce and sell to other countries to
increase the United States’ exports. The increased prices would result in consumers having to
pay more for goods made in the United States, but since American consumers would have more
money due to the tax cuts they could afford the increase in prices. The United States though
would make more money from other countries buying their exports at a higher price. The free
trade agreements signed by Obama allow the United States to trade with Panama, South Korea,
and Colombia without having to deal with a tariff. This just further pushes aggregate demand to
the left since consumers will have more money to purchase more goods because they will not
have to deal with paying for higher taxes on goods.
McCain’s tax cuts to businesses would be a policy that would affect the supply side of the
macro economy. Conservatives generally have the belief that the best way to stimulate the
economy is through tax cuts for businesses instead of consumers. When businesses are given tax
cuts their cost of production decreases, thus allowing them to spend the money that would’ve
been spent on taxes for other areas. Using the aggregate supply and demand model again this
would shift the supply curve to the right because a business would be able to make more goods
since they could afford more employees and better machinery. This would increase the output of
companies and would allow them to sell to overseas markets that would help close the trade
deficit gap. Also the prices would rise as in the demand side economics and it would yield the
same result but the difference would be whether the consumers got the money directly from the
government through tax cuts or if they got it through businesses receiving tax cuts and
employing more people. Either way the trade deficit would decrease from higher prices because
foreign markets would have to pay more for the same goods and would not be receiving the same
benefits as the Americans would from the improving economy. Mitt Romney’s ideas to close the
gap involve exposing the United States to as many markets as possible so that it will have the
greatest chance to sell its product to foreign markets. He also believes that if the United States
can get China to allow the currency market to value its currency then the United States will be
allowed to trade with it on a more equal playing field. The United States buys the majority of its
imports from China so by making a more even trading field with China Mitt Romney would be
allowing American businesses and consumers to make more money from their sales towards
China while saving more money when purchasing from China. This would result in the trade
balance gap closes rather rapidly since the United States does extensive trading with China.
My stance is with President Barack Obama and his plan to close the gap through opening
up free trade agreements with as many countries as possible and through his demand side
economics. Taxing the richer members of Americans more heavily will result in the government
having more money to spend on programs to close the trade deficit and the richer people will not
have to worry about going into poverty due to a higher tax rate. President Obama has seen a
decrease in the trade deficit already, and if he can get more legislation passed through Congress
then he will be able to close the trade deficit even further if he is reelected. Putting money
directly into the hands of consumers allows them to purchase goods from companies that are in
high demand and also allows them to reinvest that money directly back into the economy which
will not only close the federal deficit but will also help the federal debt as well.
Graphs
Table 1: China's Trade with the United States, 2001-10 ($ billion)
Notes: *Calculated by USCBC. US exports reported on a free-alongside-ship basis; imports on a general customs-value basis.
Source: US Department of Commerce; US International Trade Commission (ITC)
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
US exports
19.2
22.1
28.4
34.7
41.8
55.2
65.2
71.5
69.6
91.9
% change*
18.3
14.7
28.9
22.2
20.5
32.0
18.1
9.5
-2.6
32.1
US imports
102.3
125.2
152.4
196.7
243.5
287.8
321.5
337.8
296.4
364.9
% change*
2.2
22.4
21.7
29.1
23.8
18.2
11.7
5.1
-12.3
23.1
Total*
121.5
147.2
180.8
231.4
285.3
343.0
386.7
409.2
366.0
456.8
% change*
4.5
21.2
22.8
28.0
23.3
20.2
12.8
5.8
-10.6
24.8
US balance
-83.0
-103.1
-124.0
-162.0
-201.6
-232.5
-256.3
-266.3
-226.8
-273.1
Table 7: China's Top Trade Partners, 2010 ($ billion)
Source: PRC General Administration of Customs, China's Customs Statistics
Rank
Country/region
Volume
% change over 2009
1
United States
385.3
29.2
2
Japan
297.8
30.2
3
Hong Kong
230.6
31.8
4
South Korea
207.2
32.6
5
Taiwan
145.4
36.9
6
Germany
142.4
34.8
7
Australia
88.1
46.5
8
Malaysia
74.2
42.8
9
Brazil
62.5
47.5
10
India
61.8
42.4
Table 9: China's Top Import Suppliers, 2010 ($ billion)
Source: PRC General Administration of Customs, China's Customs Statistics
Rank
Country/region
Volume
% change over 2009
1
Japan
176.7
35.0
2
South Korea
138.4
35.0
3
Taiwan
115.7
35.0
4
United States
102.0
31.7
5
Germany
74.3
33.4
6
Australia
60.9
54.1
7
Malaysia
50.4
55.9
8
Brazil
38.1
34.7
9
Thailand
33.2
33.3
10
Saudi Arabia
32.8
39.2
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