The US Trade Deficit
Lauren Frischman
Macroeconomics EB211-02
Dr. McPherren
11/22/13
Thousands of goods are produced all over the world every day. Not every country can
produce all that it needs to survive for a reasonable price. The United States cannot feasibly
produce every good for less money than what other nations can; therefore, it is necessary to
import goods. The comparative advantage of the United States has fluctuated in the past fifty
years. A country with a comparative advantage will be an exporter because domestic prices are
below world price. Countries without a comparative advantage will find that domestic prices are
higher than world price and will import more goods than they export. A trade deficit occurs
when a country imports more goods than they export. This leads to a negative balance of trade
and can reflect poorly on a nation’s economy. The trade deficit in the United States has been
slowly increasing in recent years and has reached record high numbers. Looking back at
American history can help us understand how the United States has reached such a high trade
deficit.
Many American goods were produced during World War II and into the 1950s. Industry
was booming while the war was being fought in order to produce weapons, transportation, and
clothing for the soldiers, for example. By the 1950s, the economy had grown by 37%. Many
veterans from WWII were able to attend college and achieve better employment opportunities.
American jobs were secure and the economy was healthy during this time. The standard of
living increased, and Americans consumed one third of the world’s products. The economy of
the United States was much better than the other countries that had been in World War II.
Entering the 1960s, the United States was the largest exporter powerhouse in the world.
America had a trade surplus during this time where they exported more goods than they
imported. Beginning in the 1970s, other countries, such as Mexico and Japan, started exporting
more and more products which Americans started buying. America entered in to a trade deficit
in the late 1970s, leading in to the 1980s. The real trade balance exceeded the nominal trade
balance in a negative way due to inflation.
The world experienced an oil shock in the late 1970s which brought record high prices
and shortages of oil. This lead to a period of stagnation in international trade as well as inflation
within our own borders. Inflation rates dropped from 13.5% to 3.2% from 1980-1983. As
inflation dropped, real interest rates increased leading to a recession in 1980-1982. By 1982, the
stock market in the United States had a period of prosperity. After 1983, the economy started to
stabilize and grow and inflation was under control. From 1981 to 1989, GDP increased by about
23%. In addition, the value of the US dollar rose leading to higher prices for other countries;
therefore, the United States was exporting fewer products. This was the beginning of the US
deficit. It wasn’t as easy to sell American goods in foreign markets due to their expensive prices.
On the other hand, it was easier to import foreign goods in to the United States because they
became cheaper due to currency exchange rates. Many Americans were buying foreign made
goods since they were cheaper, decreasing production on US soil.
The late 1980s in to the 1990s was a period of economic prosperity for the United States,
but there was a steadily rising trade deficit. By 1998, the value of the US dollar was decreasing
and US trade deficit reached 2.9% of the gross domestic product. The United States had fewer
barriers to foreign trade at this time unlike other countries which had heavy tariffs, quotas, and
domestic content laws. Countries with less market openness were less likely to purchase as
many American made goods. There was a greater demand for the import of goods than the
export of goods in the late 1990s. Eventually, the economy of the United States wasn’t as strong
as other competitive nations. The U.S. Trade Deficit Review Commission (TDRC) was created
in 1998 in order to study the trade deficit by its causes and try and determine its consequences.
The US had a surplus of technology trade, but a huge deficit of merchandise trade. As the
United States started to move towards technology and knowledge sectors of the economy, it
started focusing less on merchandise production.
Moving in to the early 2000s, the trade deficit continued to rise. Demand for foreign
made products, such as cars and machinery parts, in the United States increased. The trade
deficit reached a new record of $369.7 billion. Having more imports than exports was a sign that
the economy was expanding, poverty was declining, and unemployment was following because
Americans were able to purchase more goods.
The trade deficit reached $559.9 billion in 2011 and lowered to $540.4 in 2012 with a
3.5% decrease. The deficit in petroleum goods decreased, while the deficit in non-petroleum,
manufactured goods increased. Many manufacturing jobs how moved outside of the United
States to save companies millions of dollars. Unfortunately, this leaves thousands of Americans
out of work. An estimated 2.7 million jobs were lost from 2001-2011 from the trade deficit that
the United States has with China alone. China, Japan, and Korea all helped contribute to the
non-petroleum manufactured good deficit with their lower costs of production.
The United States has experienced prosperity as well as many economic hard blows. The
history of the trade deficit can help determine what is happening in our economy today. Looking
back, the economy has been influenced by wars, leaders’ decisions, and other nations’ actions.
Periods of prosperity are followed by periods of recession, and vice versa. Even though the
United States is running a very high trade deficit, the economy is not in shambles and we are still
a competitive nation around the world. We have a higher standard of living than other countries,
which is a reason why we import so many foreign goods.
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