South-Western College Publishing - Economics  

Deepening Deficit
Subject International and Developmental Economics
Topic International Finance
Key Words Balance of Payments, NAFTA
News Story The Commerce Department reported that the nation's trade deficit grew by 17% in May on the strength of record levels of imports and slightly decreasing exports. Trade deficits with Canada, Mexico and China grew while the deficit with Japan fell. The trade balance improved for manufacturing and services but deteriorated in the energy and food sectors because of price swings.

The continued expansion and strength of the U.S. economy especially in contrast to most of the U.S. trading partners is partly responsible for the strong demand by the U.S. for imports and the strong dollar. A strong dollar makes imports relatively inexpensive and exports expensive for foreign buyers. The deficit with China has been rising in spite of the rapid growth in the Chinese economy. Chinese markets are not very open to U.S. goods and services and therefore the amount of imports from the U.S. are not as large as the strength of the Chinese economy might indicate.

The North American Free Trade Agreement has increased trade with Mexico and Canada considerably. Exports to Canada are up 12% and Mexico 21% this year. (Updated September 1, 1997)

  1. What are the main components of the U.S. Balance of Payments?
  2. If the balance of payments must balance, how can we have trade deficits?
  3. What is the North American Free Trade Agreement? How did it affect trade between the U.S. and Canada? Mexico?
  4. If the U.S. economy were to contract, how would this affect the U.S. trade deficit? Why?
Source Richard W. Stevenson, "Trade Deficit is 17% Wider: Record Imports, Dip in Exports," The New York Times, July 19, 1997

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