South-Western College Publishing - Economics  
Is It My Imagination, or Are You Skinnier-the Slimming of the U.S. Trade Deficit
Topic International Trade
Key Words Imports, Exports, and Trade Deficits
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Reference ID: A149332246

News Story The U.S. trade deficit may have gotten as skinny as it's going to get. The U.S. Commerce Department's June, 2006 figures indicate that the nation's trade deficit reached $64.8 billion, modestly below the $65 billion recorded in May. These data reinforce the notion that the slowing economy in the United States, combined with faster economic growth overseas, is gradually reining in the U.S. trade imbalance with the rest of the world.

Economists say the new data suggest the trade deficit has stabilized since it hit a peak of $66.6 billion in October of 2005. "It does look like the Queen Mary is turning," said Brian Bethune, an economist at the forecasting company Global Insight.

In June, the U.S. trade deficit with the European Union dropped by $1.8 billion to $9.0 billion. U.S. trade with Japan improved such that the deficit fell by about $150 million to $7 billion. At the same time, the lingering deficit with China continued to increase. American exports to China fell by $200 million, while imports from China rose by $1.8 billion resulting in an increase in the deficit with China of $2 billion.

Most analysts agree that the changing pattern of global economic growth will result in further narrowing of the American trade deficit, but two major obstacles stand in the way. Oil prices are likely to remain high and continue to increase the nation's import bill in months to come. Second, policies in many developing countries--most notably China--do not allow their exchange rates to rise against the dollar, which makes Chinese products more desirable than American goods.

"We are seeing an improvement in the deficit against the developed world primarily because we have currency moves there," said Wells Capital Management's chief investment strategist James Paulsen.. "But we have had virtually no currency change against the developing world."

Discussion Questions:
1. Define and discuss the trade deficit. Compare it to the U.S. budget deficit. Which is more harmful, in your view?
2. How does a slowing economy in the U.S. reduce the trade deficit?
Multiple Choice/True False Questions:
1. A weakening dollar will make U.S. goods more desirable to the rest of the world and contribute to decreasing the trade deficit.
  1. True
  2. False
2. Higher world oil prices contribute to the deficit because it decreases the amount of money flowing out of the U.S. to pay for imports.
  1. True
  2. False
Source Eduardo Porter, "U.S. Trade Gap Narrowed in June", The New York Times Online, August 11, 2006.
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