BLOG- GLOBAL ECONOMICS
Balance of trade is the relationship between a country’s imports and exports over a given period of time. A positive balance reflects a trade surplus when there is more exports than imports while a negative balance results in a trade deficit as a result of more imports than exports. In other words, therefore, a trade surplus is an economic measure for a positive balance of trade, representing a net inflow of domestic currency generating from foreign markets (Jackson, 2012). A country with a trade surplus has control over majority of its own currency which results in reduced risk for other nations selling the currency. The net effect of this is a drop in the value in the value of the other nation’s currency to the benefit of the nation with a trade surplus. The rise in the value of a nation’s currency translates into cheaper imports (Jackson, 2012).
On the other hand, a trade deficit refers to an economic measure for a negative balance of trade whereby a country posts more imports relative to its exports. A trade deficit therefore relates to an outflow of a nation’s domestic currency to its foreign markets. In the recent decades, the United States has experienced growing trade deficit, meaning that significantly huge amounts of the U.S. dollar are increasingly being held by foreign countries led by China (Jackson, 2012). There is the danger of the foreign nations deciding to sell the U.S. dollars at any time which may drive its value down making it costly to purchase imports.
In the video “China overtakes US as world’s top trading partner” hosted on YouTube at http://www.youtube.com/watch?v=2i9i0rWz0aM, current aspects of the China’s trade surplus and the US’s trade deficit are evaluated. It is the general argument of the presentation that the trade deficit has become problematic in the U.S. because of misplaced popular and political misconceptions of the deficit to China’s “unfair” foreign trade consequences that are out of line tenets of “free trade.” As a result, the U.S. has increased actual and potential protectionist actions. Economists are of the opinion that the U.S. deficit problem has been as a result of growth of total debt as compared to the growth of output, as opposed to small but increasing proportion of the debt owed to foreign nations.
In the first half of 2012, the U.S. trade deficit in manufactures is reported to have risen by 7 percent, which represented a consistent upward trend since the 2008-9 global recession, but a comparatively slower pace than the 12 percent increase in 2011 and 24 percent increase the year before. On the contrary, the Chinese trade surplus in manufactures in the first half of 2012 was noted to have increased significantly by 24 percent. This followed a rapid growth of 23 percent in 2011 and a 27 percent growth in 2010. The U.S. exports of manufactures in the first half of 2012 grew by $48 billion (9 percent) as compared to the same period in 2011; its imports grew by $62 billion (8 percent), while the trade deficit increased by $15 billion (7 percent). In striking contrast, the Chinese manufactured exports in the same period in 2012 rose by $80 billion (11 percent), imports grew by $13 billion (a mere 2 percent, while the surplus increased by $67 billion (24 percent). The 10 percent increase in industrial production together with the 2 percent growth in imports signifies that there is significant increase in China’s domestic value-added in manufacturing. China has realized large increase in surplus while other nations continue to experience growing deficits, in particular the United States. Chinese manufactured exports have experienced rapid growth of 74 percent relative to the U.S. exports (45 percent) in the last three years. China has had dramatic growth since 2000 when the U.S. manufactured exports were about three times larger than those of China. As of 2012, the Chinese manufactured exports were 58 percent larger than the U.S. exports, and threatening to double the U.S. exports by mid-decade. U.S. manufactured exports, which account for in excess of 70 percent of all merchandise exports, grew to about 45 percent since 2009. With current growth rate of 73 percent, the U.S. exports risk falling short of President Obama’s objective to double U.S. exports in a period of five years starting year 2009 (Blecker, 2011). On the flipside, China is on track to achieve more than doubling, with almost 114 percent export growth. The rapidly rising Chinese surplus towards $1 trillion per year is bound to afford China the financial resources for growing its overall international economic might and influence along with forcing other major competing exporters of manufactures (particularly the United States, the EU, Japan, and South Korea) to adopt measures such as exchange rate, trade as well as other policies in order to remain competitive with China. This is especially the case considering that the Chinese surplus has been on a steady rise since 2000 from $50 billion to almost $817 billion in 2012, with all signs that China is bound to overtake the United States as the number one economy in the world in the not-so-long future (Jackson, 2012).
The trade imbalances are attributed to highly lopsided bilateral trade account, in which the U.S. manufactured imports from China accounting for more than six time the U.S. exports to China, and the U.S. bilateral deficit with China matching the 71 percent of the total U.S. global deficit, and increasing faster relative to the trade deficit with other parts of the world. In the first half of 2012, the Chinese manufactured exports to the U.S. grew by $14 billion (9 percent), while the Chinese imports from the U.S. grew by less than $1 billion (3 percent). The U.S. bilateral trade deficit with China thus grew by $13 billion (9 percent). In 2012, the U.S. global deficit stood at a massive $495 billion from $326 billion recorded in 2009. This has had the ripple effect of between 700,000 to 1.4 million trade-related U.S. manufacturing jobs, which represents nearly 10 percent of the total manufacturing employment over the three-year period. In the calendar year 2012, it is estimated that the deficit cost the U.S. 130,000 -260,000 jobs. In other direction, the extremely large growth in trade surplus has enabled China to sustain double-digit growth in its industrial production leading to a large increase in jobs.
Causes of the US Trade Deficit
Generally, the U.S. trade deficit has been as a result of a web of interlinked and self-perpetuating mechanisms both domestically and abroad that have rendered it difficult to reduce the deficit using conventional policies (Blecker, 2011). It started with the loss of competitiveness by U.S. industries almost three decades ago together with periodic bouts of dollar overvaluation. Many industries gradually moved offshore outsourced their inputs to the extent that many goods (both intermediate and final) have increasingly been imported and initial levels of domestic production failed to be restored even when the dollar depreciated.
Also, the U.S. was lend much funds by many other nations that aimed to sustain their own domestic employment thus effectively transferring the manufacturing employment straight from the United States to themselves. In the same light, much U.S. borrowing from other nations translated that American businesses and households in the aggregate financed expenditures well beyond levels otherwise permissible by the national income together with the domestic saving (Jackson, 2012).
Thirdly, the rapid fall in the personal saving rate in the U.S. in the lead-up to the Great Recession also contributed to the growth of the trade deficit. This is because there was stagnation in the middleclass and low-class as a result of fading good-paying jobs in industries thrashed by imports together with the increasing suppression of wage for workers lucky enough to retain their jobs (Blecker, 2011). This translated that most families were forced to rely on debt instead of income growth so as to sustain their consumption standards before the crisis.
In addition, there was rapidly increasing discrepancy in real value of the dollar vis-à-vis other currencies that formed a barrier to trade deficit adjustment because apparent lower value of the dollar in comparison to the other currencies of mainly the developing nations supplying most of U.S. imports. At the peak of the 2007 global expansion, the U.S. deficit was the largest in the world at $718 billion.
Solutions
The two aspects of balance of trade – trade surplus and trade deficit – are important in international trade especially for the leading global manufacturers, China and the United States. The manufacturing sector is crucial for both China and the U.S. in view of the fact that manufacturing is at the heart of attaining technology-driven economic growth, export competitiveness, and defense modernization (Blecker, 2011). The U.S. must work to address its deficit problem because manufacturing firms constitute 70 percent of the entire U.S. civilian R&D besides being at the core of defense industry. In terms of export competitiveness, the U.S. manufacturing claims the largest share of trade of more than 70 percent of the global merchandise exports and over 90 percent of Chinese exports.
The takeover of China from the U.S. as the world’s leading economy seems inevitable. While at present there is much political discussion on the $16 trillion national debt, it is evident that little attention is being paid to the rapidly rising U.S. treasury being held by foreign central banks to a tune of $5million as of 2012 (Jackson, 2012). The purchasing of the U.S. Treasuries by the foreign central banks has significantly contributed to the $500 billion annual U.S. current account deficit. There is also the risk of raising both current account and fiscal deficits if there would be increases in the U.S. Treasury bond yields.
In an effort to reduce both its trade deficit and subsequent foreign debt buildup, the United States needs to consider a comprehensive strategy in restoring a rules-based multilateral economic system. The focus ought to be on significantly reducing the deficit in manufactures instead of returning the trade surplus that the United has held for decades. Much attention need to be placed on both the exchange rate policy and currency manipulation. The U.S. needs to challenge the current IMF policy that forbids countries form manipulating their currencies in order to gain unfair competitive advantage in trade (Blecker, 2011). This is particularly necessary in light of the fact that it has been a long practice of the Chinese Central Bank to make protracted large-scale purchases resulting in a tenfold increase in China’s trade surplus in manufactures.
References:
Blecker, A, R. (2011). Global Imbalances and the U.S. Trade Deficit. Retrieved from: http://nw08.american.edu/~blecker/research/Blecker_Imbalances_May2011.pdf
Jackson, K. J. (2012). Financing the U.S. Trade Deficit. Retrieved from: http://www.fas.org/sgp/crs/misc/RL33274.pdf
