What the Trade Deficit Is: The trade deficit is when the total goods and services the U.S. imports is greater than the total it exports. In 2005, the total U.S. trade deficit was $701 billion, which is $1,287 billion in exports minus $1,988 billion in imports. (Source: U.S. Census Bureau, "U.S. International Trade in Goods and Services,"Annual Revision for 2005).
The Two Major Categories of the Trade Defict: The two major trade categories that create the U.S. trade deficit are petroleum-related products and consumer products. Together, these categories were 74% of the trade deficit. In 2005, the U.S. imported $519 billion more of goods and services in these two categories than it exported, and that equals 75% the total trade deficit of $701 billion.
Petroleum-related Products: Petroleum-related products consist primarily of crude oil, natural gas, fuel oil and other petroleum-based distillates such as kerosene. These imports totaled $251 billion in 2005, and accounted for 12% of total imports. Since the U.S. only exported $22 billion worth of petroleum products, its trade deficit in this product was $229 billion, which was 33% of the total trade deficit of $701 billion.
Consumer Products: The major consumer products that the U.S. imported more than it exported were Drugs, Consumer Electronics, Clothing, Household Goods, and Furniture. The U.S. imported $407 billion, while only exporting $115 billion in the Consumer Products category in 2005.
Automotive and Food: Automotive is another category where the U.S. ran a trade deficit in 2005. It imported $239 billion worth of cars, trucks and auto parts, and only exported $98 billion.
At $2.5 trillion, the U.S. is one of the world’s largest food producers. However, it is a net importer of food, exporting only $59 billion and importing $68 billion.
The U.S. Is a Net Exporter of Services: Overall, the U.S. is a net exporter of services. It exported $380 billion in services while importing only $314 billion. This is because of its success in exporting royalties and license fees, and other private services including financial services.
The Primary Trading Partners: The primary trading partners with the U.S. are Canada, Mexico, China and Japan. Over one-third of U.S. exports go to Canada and Mexico, with another 15% going to Japan, China and the UK. The U.S. receives one-third of its imports from Canada and China, with Mexico and Japan contributing an additional 20%.
Why an Ongoing Trade Deficit Could Harm the Economy: An ongoing trade deficit could be detrimental to the nation’s economy over the long term because it is financed with debt. In other words, the U.S. can buy more than it makes because the countries that it buys from are lending it the money. It is like a party where you’ve run out of money, but the pizza place is willing to keep sending you pizzas and put it on your tab. Of course, this can only go on as long as there are no other customers for the pizza, and the pizza place can afford to loan you the money. One day the lending countries may decide to ask the U.S. to repay the debt. On that day, the party is over.
What Could Happen If the Dollar Declines: One thing that could cause the lenders to ask for their money back is a fear that their loans will be worth less due to a declining dollar. Unlike you or me at the pizza party, the U.S. government can simply print more money to pay back the loans. Of course, that makes each dollar worth less. If the lenders fear that the dollar is declining rapidly, then they will all try to recall their loans quickly to avoid losing the value of the loan as the dollar declines.
The U.S. Could Be Losing Its Competitiveness: A third concern about the U.S. trade deficit is the statement it makes about the competitiveness of the U.S. economy itself. By purchasing goods overseas for a long enough period of time, U.S. companies no longer have the expertise or even the factories to make those products. Try finding a pair of shoes made in the U.S. As the U.S. loses competitiveness, it has even lower quality jobs and the standard of living declines.
Sources Used: http://www.bea.gov/bea/di/home/trade.htm and https://www.cia.gov/cia/publications/factbook/geos/us.html
