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 2007, the total U.S. trade deficit was $708.5 billion, which is $1.6 trillion in exports minus $2.2 trillion in imports. The deficit improved by $50 billion in 2007, thanks to higher exports, a result of the declining dollar. (Source: U.S. Bureau of Economic Analysis, "U.S. International Trade in Goods and Services,Exhibit 1", March 11, 2008).
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 87% of the trade deficit.
The trade deficit by category was:
- $293 billion for petroleum related products,
- $328 billion for consumer products,
- $193 billion for all other goods,
- $107 billion in surplus for services.
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 $331 billion in 2007, 10% more than the $302 billion imported in 2006. Since the U.S. only exported $38 billion worth of petroleum products, its trade deficit in this product was $293 billion, which was 41% of the total trade deficit of $759 billion, up from 36% in 2006.
Despite record-setting higher prices in 2007, oil had become a larger contributor to the U.S. trade deficit than in 2006 or 2005.
Consumer Products: In 2007, the U.S. imported $475 billion, up from $443 billion in 2006, and exported $146 billion, also up from $130 billion in 2006. The major consumer products that the U.S. imported more than it exported were Drugs, Consumer Electronics, Clothing, Household Goods, and Furniture.
Automotive and Food: Automotive is another category where the U.S. ran a trade deficit in 2007. It imported $257 billion worth of cars, trucks and auto parts, and exported $121 billion, also up from $107 billion in 2006.
In 2007, the U.S. barely became a net exporter of food, exporting $84 billion, (up from $66 billion in 2006) while importing $82 billion (up from $75 billion in 2006).
The U.S. Is a Net Exporter of Services: Overall, the U.S. is a net exporter of services. It exported $479 billion (up from $423 billion in 2006) while importing only $372 billion (also up from $343 billion in 2006). 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. About 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, Japan and Germany 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.
How the Dollar Decline Affects the Trade Deficit: The dollar has declined 40% against the euro in the last six years. This means that U.S. goods and services are 40% cheaper for Europeans. This makes makes U.S. companies more competitive, and increases exports. In fact, exports have gone up 12%, from $1.4 trillion in 2006 to $1.6 trillion in 2007. (See The Value of the Dollar)
However, imports have gone up, as well, from $1.86 trillion in 2006 to $1.96 in 2007, or 5%. Thats because oil is priced in dollars, so as the dollar declines, OPEC must increase its price to maintain their revenue stream. The U.S. reliance on oil means it may always be in deficit.
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. (See U.S. No Longer World's Largest Economy; U.S. Economy Produces Fewer of World's Richest People; The U.S. Is Losing Its Competitive Edge)
