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Most economist view trade as an integral part of the free market system. The United States economy is currently running a trade deficit, an excess of imports over exports. The U.S. trade deficit widened much more than expected in June. The whole topic of trade must be viewed from a total picture, not just a segment or portion of the issue. This paper will analyze the current position of the trade deficit and some of the factors that have caused the gap to expand.
Trade Gap Defies Expectations
Most economist view trade as an integral part of the free market system. “Trade allows specialization and division of labor and thereby promotes technological growth” (Colander, 2004, p. 414). The United States economy is currently running a trade deficit, an excess of imports over exports. This shortage is currently being financed by the selling of assets such as stocks, bonds, and real estate. The balance of trade has been in a deficit position since the 1970s and will probably continue in this direction for quite some time, “since the assets of the United States total many trillions of dollars” (Colander, 2004, p. 416). This paper will analyze the current position of the trade deficit and some of the factors that have caused the gap to expand.
“The U.S. trade deficit widened much more than expected in June” (Reuters, 2004). This increase was due to a large drop in exports, the largest in three years, and a record level of imports. In fact, exports fell 4.3% which represents the largest decline since September, 2001. During this same time period, imports climbed 3.3%. This increase is partly due to the run-up in oil prices – the highest since March, 1982. Not only did prices increase, but the quantity of crude imported rose as well.
“The primary trading partners of the United States are Canada, Mexico, the European Union, and the Pacific Rim countries” (Colander, 2004, p. 415). The numbers from the June report showed that the U.S. trade gap with Mexico reached a new record and is on tract to break last year’s record numbers. Another country in which the trade gap has widened is China. The exports to China eased while imports climbed to an all-time high. This relationship is much more politically sensitive. In fact, “U.S. manufactures and labor groups complain that Beijing’s policy of holding the value of its currency steady against the dollar has given it an unfair trade advantage” (Reuters, 2004).
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As with many ventures, there are those that benefit and those who do not. Such is the case with international trade. The industries that are negatively impacted are those in which the United States imports a large quantity of goods such as:
Miscellaneous textile article (linen, etc.)
Fish and seafood (frozen shrimp)
Textile floor coverings (knotted and woven carpets)
Iron/steel products (household articles, cast iron, tubes/pipes)
The industries that benefit are those who are able to export their products. Such as
Machinery (computers and components, gas turbines, telecom, etc)
Electrical machinery (recording/sound media)
Medical and surgical equipment/instruments
Aircraft, spacecraft (small aircraft)
Cotton and cotton waste
Woodpulp, etc. (waste and scrap of paper and paper board) (Indianembassy.org).
Therefore, the whole topic of trade must be viewed from a total industrial picture, not just a segment or portion of the issue.
The effects of this increase in the trade deficit will likely lead economists to lower their expectations of an upward revision of the government’s measure of the second-quarter economic growth. Also, the public’s attention to imports and exports may change. If there is a growing feeling that the country could be heading back into a recessionary period then pressure to impose trade limitations could increase considerably. However, one must not lose sight that “the U.S. economy will inevitably become more interdependent with other economies of the world,” thus free trade will become increasingly important. (Colander, 2004, p. 433).
Colander, David C. (2004) (5th Ed.).Macroeconomics [University of Phoenix Custom Edition e-text]. Burr Ridge IL: Irwin/McGraw Hill Publishing. Retrieved July 15, 2004 from University of Phoenix, Resource, ECO/360- Macroeconomics Web site: https://mycampus.phoenix.edu/secure/resource/resource.asp
Indianembassy.org. (2002). India-US trade data for the first ten months of 2002. Retrieved August 16, 2004 from http://www.indianembassy.org/indusrel/trade_2002.htm
Reuters. (2004). Trade gap defies expectations, hit record. Retrieved August 15, 2004 from http://www.usatoday.com/money/economy/trade/2004-08-13-trade-deficit_x.htm