The US trade deficit is nearing its all-time high —

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The US trade deficit in goods and services hit $67 billion in August. Nominally, that is the second highest trade deficit ever recorded for a month, just after $68 billion in August 2006, according to data recently released from the US Census. Adjusting for inflation, the deficit hasn’t been this high since 2009.

The deficit has ballooned during the Covid-19 pandemic. While US imports did fall, exports are down even more. Exports of aircraft, cars, and oil fell dramatically, while imports stayed closer to normal largely because of a massive increase in gold imports and pharmaceutical supplies. If the deficit continues to grow at its current pace, it will soon become the largest it’s ever been.

This is probably disappointing for Donald Trump who has argued the trade deficit is a major problem. But is it really such a bad thing that it is rising?

The primary reason the US typically has such a large trade imbalance is that it’s the world’s reserve currency. People all over the world want to hold dollars. When foreigners sell goods to people in the US, they don’t always use that money to immediately buy stuff from American companies, but rather, because the dollar is such a safe asset, they keep it. That allows Americans to consume more than they produce.

One consequence of having the world’s reserve currency, and thus running a trade deficit, is that it makes the dollar artificially strong. An inflated exchange rate for the dollar makes it challenging for manufacturing to thrive since it makes buying goods from the US so costly. In addition to automation and offshoring, the strong dollar has been another reason the US has lost so many manufacturing jobs over the last several decades.

The big increase in government support programs during the pandemic also widened the trade deficit. The US federal government borrowed a lot of money to boost unemployment insurance and give out stimulus checks during the pandemic. The US outspent nearly every other country, which has allowed US consumers to continue to spend on imports. It’s one of the bright sides of being able to run a deficit. It’s very nice to be able to borrow in a crisis.

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