Comprehensive Study: US Trade Deficit, Causes, and Implications

This report provides a comprehensive analysis of the US trade deficit. It defines trade deficit, explains its implications, and examines the balance of payments. The study investigates the causes of the US trade deficit, including factors like domestic production, oil imports, and the US-China trade relationship, highlighting the impact of tariffs and trade wars. It explores the advantages and disadvantages of trade deficits, considering the US's competitiveness and economic health. The report also discusses the shrinking trade deficit and the role of domestic savings and affluence. It concludes with a balanced perspective on trade deficit, emphasizing that it's not always an indicator of economic downfall and offers a detailed descriptive study of the trade deficit in the context of the United States of America.

Running head: US TRADE DEFICIT: A STUDY
US TRADE DEFICIT: A STUDY
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1US TRADE DEFICIT: A STUDY
Trade deficit can be defined as the amount by which the cost of a nation’s imports exceeds the
value of its imports during a given period of time. A trade deficit constitutes of an outflow of
domestic currency to the foreign market. Trade deficit also signifies a negative balance in trade,
where there is outflow without adequate income. The respective paper is a descriptive study of
trade deficit in the context of the United States of America. The paper scrutinizes, identifies and
evaluates the causes and reasons for trade deficit in America, its advantages or disadvantages, if
any, and how is the country coping with such issues in an all comprehensive and holistic manner.
Balance of Payment (also called BOP) is a mechanism where the nations of the world record
their trading activity. In the section of Balance of Payment, there is a sub section which is known
as current account that tracks goods and services that leaves exports and enters imports. The
current account also shows direct transfers like foreign trade, asset income from foreign direct
investment (FDI) as well as the Balance of Trade. Trade deficits occur when a nation fails to
produce enough goods for the residents of the country and therefore, they become obligated to
borrow goods and services from the foreign countries. However, in certain peculiar cases, a trade
deficit can also signify the wealth of a country, which means that the consumers of the country
are well-to-do enough to buy goods and services from outside the country.
According to the industrial and marketing statistics, in November of the year 2019 the trade gap
dropped 8.2 per cent to $ 43.1 billion and it is recorded as the smallest trade deficit the country
has witnessed since 2016 (Reuters.com., 2020). In case of US trade deficit that fell piercingly in
the November of 2019 for the second month in a row and also happened to sink the lowest in the
previous three consecutive years reflects a clear picture of decline of Chinese imports and the re-
emergence of the USA as energy powerhouse.

2US TRADE DEFICIT: A STUDY
The cause behind such decline of trade deficit in the USA is multidimensional and multilateral.
The overall trade deficit shrinking of the United States can be the effect of improvement of
American economy, soaring of domestic oil production and also the global trade war tactics the
country is about to head where the trading terms of America would be completely rewritten. An
increase in domestic oil production was a major factor in the process of shrinking of trade deficit
where the imports of foreign crude oil was cut down by $30.3 billion last year. Exports of civil
aircraft also decreased by $12.6 billion last year and the reason for such action can be traced
back to the fatal crash of the plane Boeing’s 737 MaxAirplane (Nytimes.com., 2020). However,
one of the major reasons for shrinking of trade deficit of the nation is targeting the country China
by the president of America, Mr. Donald Trump in terms of trade offenses. As America is
famous for sinophobia, therefore, such moves are not new for the globe. The trade deficits in
goods with China have dramatically shrank from $73.9 billion to $345.6 billion in 2019. It has
been considered as the first drop on an annual basis in the year 2016 because both the United
States and China placed tariffs on billions of dollars on each other’s products. Since both the
countries are facing some kind of political rivalry among themselves, American goods are not
encouraged in China and vice- versa. The US imports of China have certain unnecessary and
digressing restrictions. According to a group of Chinese scholars, the United States must supply
the right products at the right prices to make it possible for China to honor its commitment under
the recent trade deal that the US had with China. Nevertheless, many scholars speculate that
China does not have the capacity to purchase goods and services from the US as the nation
herself is going through an economic developmental phase. In particular, it can be noted that
American imports from China has sharply declined in the final two months of the year 2019 as
the companies worked to avoid tariffs that have been newly imposed by the government of the

3US TRADE DEFICIT: A STUDY
United States. Apparently, the government of the US has placed on $360 billion worth Chinese
goods which has the potential to completely disrupt import- export trade relations with China.
According to Mr. Donald Trump, America should stop buying goods and services from China
because the nation needs to build and revive her own industries and factories to make herself
inherently strong. As Trump said, the import tariffs on China would ensure a “blue collar boom”
to the nation. American economic downpour might be revived again by the producing premium
goods and services in the country itself more than purchasing products from outside. Although
certain economists are skeptical regarding the move and the reasons they provide is that the
performance of the country’s factories have considerably weakened last year and that trade flows
largely reflect a cooling down of American and global economy, Trump and his team is
confident about the positivity that the move might bring in for the country. Certain economists
also argue that the hefty tariff imposed on Chinese products by America have compelled the
American consumers to purchase goods from other countries as well and has not contributed in
reformation of industrial sector of America. As the clash between America and China keeps on
continuing, other countries such as Vietnam, Mexico and South Korea are getting benefited out
of it as most of the consumers of America have shifted from China to these countries for
purchase of goods and services. As per the commercial data, it can be deduced that trade deficit
in goods with Mexico has increased to $21.1 billion last year (Nytimes.com., 2020).
Petroleum deficit of the United States have been lowest till date. In the year 2019, the
exports of the United States were $180.2 billion of petroleum. The export components included
crude oil, natural gas, fuel oil and other petroleum based synthetic products and distillates such
as kerosene. The USA has developed new oil fields and has been successful in its venture as the
oil supply seems to be brimming over expectations. In the year 2019, the petroleum deficit was

4US TRADE DEFICIT: A STUDY
around $13.7 billion and that has been recorded as the lowest from the year 1998. As the nation
thankfully has premium and latest evolved technologies and devices, therefore, it does not take
extra effort or luck for the country to harness oil in the most appropriate way. The USA is also
rich in terms of minerals and oils, therefore, it can be said that the reason for such boom in oil
market is due to resource abundance and infrastructural development of the country altogether.
America is also an aggregate exporter of services as estimated. It has been observed that
the United States exports more service than it imports. Records say that she imported $847
billion in service while importing only $250 billion signifying the fact that the US services are
premium and competitive in the global market. The surplus that comes out of it helps the nation
to suffice its deficits to a certain extent. Certain services such as intellectual property, computer
services and financial services are some of the services that are traded by the United States and
the nation gains the most surplus in the mentioned areas of service (Forbes.com., 2020).
The dollar value from the year 2001 to 2007 declined to 40 per cent against the euro. The
respective figure meant that American products and services were cheaper to the Europeans
which made the European companies more competitive in the field of exports. The export
industry of the United States has bloomed to a certain extent due to such reasons. The recessions
have offset this advantage and caused global trade to decline. US exports have dropped from
$1.3 trillion in 2008 to $1.1 trillion in 2009. Imports also dropped from $1.96 trillion in 2007 to
$1.56 trillion in 2009. Both the exports and imports have risen from that time. From that time,
both the exports and imports have risen. However, due to the Eurozone crisis the euros got
weakened and dollar emerged as one of the most powerful currencies in the world.

5US TRADE DEFICIT: A STUDY
Trade deficit has certain disadvantages too. An ongoing trade deficit is detrimental for the
economy of a nation because it is financed with debt. In the peculiar case of the United States, it
can buy more than it makes because she borrows from her trading partners. Another grave
concern relating to trade deficit is that the statement it makes about the competitiveness of the
US economy itself. By purchasing goods from overseas for a long period, the companies of the
US lose their entrepreneurial expertise and productivity. Therefore, dethroning policies of trade
deficit taken by the US government is justifiable and fair (Cnbc.com., 2020).
While talking about the trade deficit shrinking of the US, the mention of Sino- American
trade war is important and significant. At the highest magnitude of trade war between the USA
and China last year, America installed tariffs on billions on Chinese goods, including consumer
products. With the advent of corona virus in the recent times, sinophobia has been radicalized
among the Americans and no American is buying any edible Chinese products from the market
(Southchinamorningpost., 2020). Such moves have substantially decreased the trade deficit of
the US in the beginning of the year 2020 and it is speculated that in the coming years, the US
will witness more shrink in trade deficit. Trump’s governance, which is highly nationalistic and
ethnocentric might create barriers for other countries to tie up with America for export purposes,
especially, the Gulf countries due to the inherent islamophobia and cultural differences between
the countries. It is a matter of time to see whether the strategy of trade deficit shrinking taken up
by the government of America is actually effective for the country or not and whether trade
deficit shrinking will prove to be a boon or a bane to the industries of the US.
Nevertheless, the disadvantages of trade surpluses which the nation of America is going
through right now are also multilateral. By observing trade deficit shrinking of the nation of the
US, it can be deduced that America has a very high rate of domestic savings, which also means

6US TRADE DEFICIT: A STUDY
that customers are not being experimental in the area of buying different products from different
markets outside the country. Throughout the study of economics, it has been proved that the
more affluent a nation is, the more would be its trade deficits. If the consumers of a nation have
money to buy premium products from outside the country, it also means that they have a high
income and also a high rated lifestyle (Benedetto, 2014). The rate of affluence and affordability
of the nation is sometimes determined by the trade deficit reports. Sometimes, the financial
capital is not wisely utilized by the countries and that can lead to poor economic health of a
nation despite having low trade deficit or trade surplus.
The particular paper concludes to be a comprehensive study on US trade deficits in the
contemporary global atmosphere. In the paper, it has been justified why trade deficit also
signifies a negative balance in trade, where there is outflow without adequate income. The paper
has also justified the fact that trade deficit shrinking is not a proof of economic health and trade
deficits are no guarantee for economic downfall with special reference to the United States of
America. The respective paper concludes to be a descriptive study of trade deficit in the context
of the United States of America. The paper concludes by scrutinizing, identifying and evaluating
the causes and reasons for trade deficit in America, its advantages or disadvantages, if any, and
how is the country coping with such issues in an all comprehensive and holistic manner.

7US TRADE DEFICIT: A STUDY
References:
Benedetto, J. B. (2014). Who Financed Recent US Trade Deficits. J. Int'l Com. & Econ., 6, 20.
Cnbc.com.,(2020). Available at: https://www.cnbc.com/2020/02/05/us-trade-deficit-december-
2019.html
Forbes.com.,(2020). Available at: https://www.forbes.com/sites/unicefusa/2020/02/13/how-
parents-can-answer-kids-questions-about-staying-safe-online/#1f11fe3a6029
Nytimes.com.,(2020). Available at:
https://www.nytimes.com/2020/02/05/business/economy/trump-trade.html
Reuters.com.,(2020). Available at: https://www.reuters.com/article/us-usa-economy-trade/u-s-
trade-deficit-drops-to-more-than-three-year-low-idUSKBN1Z61L3
Southchinamorningpost.,(2020). Available at:
https://www.scmp.com/economy/china-economy/article/3046887/trade-war-chinas-us-
imports-under-phase-one-deal-not-one