by Victor Mozambigue
The US trade deficit has now reached dangerously high levels. Hitting the ceiling again after 2012, the deficit rose to $502 billion in 2016. While a handful of economists believe it is not a problem for the economy, a majority believes that America needs to rethink its trade relations and bring back the deficit to acceptable levels. The economy has registered a deficit in trade for the 41st consecutive time. It was back in 1975 that US enjoyed a trade surplus.
What creates deficit?
The US trade deficit is huge. $192 billion is contributed to the deficit by the automobile industry. $94 billion are contributed by clothing sector and $84 billion by crude oil and fuel. Mexico, our southern neighbor is known as the auto parts supplier to the USA. The Trade deficit with Mexico has risen to $63.2 billion in 2016, the highest in the past 5 years. This is the reason President Trump has targeted the trade policies with Mexico and suggested some adjustments to NAFTA which would help in reverse the trade balance in America’s favor, a feat that was never achieved since NAFTA came into effect.
— Cristobal Santoyo (@cristo_santoyo) February 8, 2017
Autos are hardly made in America anymore. Take the example of the manufacturing sector. It employed more than 17 million Americans in the early 2000s. Instead of showing an upward trend, only 12.3 million Americans are now employed in the manufacturing sector. President Trump is trying to provide relaxation in regulations and lower corporate taxes so that the companies can introduce new manufacturing jobs within the nation. Americans are using toys, computers, electronic gadgets, and accessories that are manufactured outside the US. This brings fuel to the trade deficit fire. The entry of China in global market and various free trade agreements have made it even more difficult to ensure that the country gets a trade surplus.
Is there a bright side?
If the economy is in a deficit, it may mean that the consumers are enjoying goods and services of more value than they produce $502 billion in this case. The trade deficit does not impact the GDP of the country. However, this doesn’t mean that America should not be taking steps in lowering the trade deficit. Large firms are now working with Chinese companies to manufacture products to lower costs and earn higher profits. Such a trend will wipe out manufacturing jobs in the US.
Can we resurrect the trade balance?
President Trump made trade deficits and free trade agreements along with lowering number of manufacturing jobs, the central ideas for his election campaign. Since acquiring office, he has corrected some measures taken by former President Obama. For instance, Obama negotiated a 12-nation trade agreement which was reversed by Trump. He is also reconsidering certain provisions of the NAFTA which have helped Mexico attain a trade surplus over the US.
However, there is a bigger problem than Mexico and that is China. The US has the largest trade balance with China, which amounts to $347 billion in 2016. Even though the trade deficit with China has lowered from the 2015 figure of $367.2 billion, America needs to think about revisiting trade agreements with China. Trump also alleged that China is using unfair means to manipulate its sales in the US which helps it get an advantage over American goods. This ring true as China is responsible for 40% of the trade deficit in goods with the US.
However, the problem is not just with the external factors. Trump also needs to think about the rising value of the dollar which has made exports difficult. The White House seems keen to deflate the value of the dollar to promote American exports and levy sanctions on trade with China and Mexico so that the trade balance swings back to our favor.