What the Trade Deficit Is:
The U.S. trade deficit is when the total goods and services the U.S. imports is greater than the total it exports. In 2012, the total U.S. trade deficit was $539.514 billion. This was $2.194 trillion in exports minus $2.734 trillion in imports. This shows the economy is strengthening, since it is less than the $559.88 billion deficit in 2011. A lower deficit means exports are starting to gain on imports. This is good for business, which will eventually create more U.S. jobs. It's also less than the record $753 billion trade deficit in 2006. (Source: U.S. Census, U.S. Trade)
Petroleum Imports Drive the Trade Defict:
America's dependence on foreign oil drives the trade deficit. In 2012, the U.S. imported $313 billion in petroleum-related products, up from $252 billion in 2010. This was despite higher oil prices, which jumped from an annual average of $74.67 /barrel to $101.16/barrel in two years. Petroleum-related products include crude oil, natural gas, fuel oil and other petroleum-based distillates such as kerosene. (Source: U.S. Census, U.S. Oil Imports)
Consumer Products and Autos Contribute to the Deficit:
Another large contributor to the trade deficit is consumer products, such as Drugs, Consumer Electronics, Clothing, Household Goods, and Furniture. In 2012, the U.S. ran a $335 billion deficit in consumer products, importing $516 billion while only exporting $181 billion. This was higher than prior years, despite a relatively weak dollar and resultant mild inflation.
Automotive is another category where the U.S. ran a trade deficit in 2012. It imported $298 billion worth of cars, trucks and auto parts, while only exporting $146 billion, running a deficit of $152 billion. (Source: Census Bureau, Real Exports by Principal End-use Category, monthly, 1994 - present and Real Imports by Principal End-use Category, monthly, 1994 - present. Note: These figures have been adjusted for inflation).
The U.S. Is a Net Exporter of Services:
Overall, the U.S. is a net exporter of services. It exported $630.4 billion in services while importing only $434.6 billion. This caused a trade surplus in services of $195.8 billion. What services does the U.S. export?
- Intellectual property, as measured by royalties and license fees ($120.8 billion).
- Travel-related services ($116.1 billion).
- Financial services ($270.2 billion).
The Primary Trading Partners:
The U.S. is the beneficiary of this trade, since these are also the largest export markets. The order is slightly different: Canada (18.9%), Mexico (14%), China (7.1%) and Japan (4.5%). As you might expect, the top exporter to the U.S. is China (18.7%), followed by Canada (14.3%), Mexico (12.2%), and Japan (6.4%). (Source: U.S. Census, Top Trading Partners - Total Trade, Exports, Imports)
Why an Ongoing Trade Deficit Weakens the Economy:
An ongoing trade deficit is 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's 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 declined 40% against the euro from 2001-2007. This meant that U.S. goods and services were 40% cheaper for Europeans, making U.S. companies more competitive, and increasing exports. The recession offset this advantage, causing global trade to decline: exports dropped from $1.8 trillion in 2008 to $1.5 trillion in 2009, while imports fell from $2.3 trillion in 2007 to $1.6 in 2009. Both exports and imports have risen since then, even thought the dollar has maintained its strength since 2009 as the euro zone crisis dampens the power of the EU and its currency, the euro.
However, the dollar's long-term value is constantly pressured downwards by the U.S. debt. Furthermore, oil is priced in dollars. As the dollar declines, OPEC increases prices to maintain its revenue. The U.S. reliance on oil means it will be difficult to escape its trade deficit.
The U.S. Could Be Losing Its Competitiveness:
A third concern about the 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 lose the expertise and even the factories to make those products. Try finding a pair of shoes made in the America. As the U.S. loses competitiveness, it outsources more jobs, and the standard of living declines. Article updated March 8, 2013