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Impact of United States Trade Deficit

Since 1971, the United States has posted a trade deficit. When we import more goods and services than we export it creates a trade deficit. This trade deficit has been rapidly increasing since 1997. According to Wikepedia, contributing factors may be:

  • The dollar's role a a reserve currency
  • Continued growth in the US economy
  • Continued high demand for American investment asset
  • Overpopulation
  • Severe famine
  • Lack of natural resources
  • Rising oil prices
  • Globalization 

The USA also has an account deficit. This includes not only the flow of money out of the USA for goods and services but any outflow of money overseas such as foreign aid, support of US bases, and immigrants who send money back to families.

According to Ellen Frank in her article in the March/April 2004 issue of Dollars & Sense magazine the account deficit is rising at an fast rate. One serious consequence could be that foreigners lose confidence in the US economy and stop purchasing anything from the USA. A result of this could be a fall in the exchange value of the dollar.

She writes that this scenario could result:

"Imports would grow more expensive, infuriating our trading partners, who depend on the U.S. market for their goods. With less foreign demand for U.S. assets, stock prices might tumble and interest rates rise. United States-based banks and corporations would find it harder to buy foreign assets and expand overseas. The dollar has been in trouble before and, in the past, the U.S. government pressured other countries to buy or hold dollars and prop up its value. Whether other countries agree to this will depend, ultimately, on whether the United States and other major economic powers are still talking to one another."

In his article titled Trade Picture*, Robert E Scott writes that some of the above scenario is already happening and may bet worse. He writes that with the growing trade deficit that the US must borrow money abroad to finance its debts. He writes: "The recent decline in the dollar indicates that private foreign lenders are less willing to supply new credit. Foreign governments have been forced to step into the gap and finance a growing share of U.S. international debt. A rapid, uncontrolled decline in the dollar could push the U.S. economy into a sharp recession..."

*From the Economic Policy Institute February 10, 2005