South-Western EconNews

South-Western College Publishing - Economics

U.S. Trade Deficit Hits New Record

Subject

Trade Deficit

Topic

International Trade

Key Words

Imports, Exports, and Trade Imbalance

News Story

The United States’ foreign trade deficit now exceeds $60 billion. The nation’s trade deficit jumped 4.3 percent over the $58.5 billion posted in January, 2005 to the highest ever recorded deficit of $61 billion in February.

The deficit has risen in part because oil prices have risen sharply and imports of textiles and clothing have grown. U.S. exports have shown little growth, while imports continue to surge.

The nation’s trade deficit with China narrowed to $13.9 billion-- coming down from $15.3 in January--even though imports of Chinese textiles have surged. At the same time, imports from Japan and the European Union continue to outstrip exports, contributing to the U.S. trade deficit.

The U.S. travel industry slowed and sales of cars and auto parts to foreign countries fell in February as American exports were left almost unchanged at $100.5 billion. Led by industrial supplies like oil and steel, U.S. imports rose by 1.6 percent to $161 billion. This 4.3 percent increase in February’s trade deficit followed a five percent rise in January, 2005.

Most economists consider trade deficits to present both costs and benefits. On the positive side, American consumers benefit by consuming more goods and services than they could produce domestically, increasing the choice and variety of goods. On the negative side, deficits increase U.S. indebtedness to the rest of the world--deficits must be financed by borrowing from the rest of the world. This borrowing transfers ownership of American assets to foreign investors.

This newest report has prompted some analysts to re-think their previous predictions for U. S. economic growth. David Greenlaw and Ted Wiesman at Morgan Stanley adjusted their forecast for first-quarter growth in U.S. GNP (gross national product) downward from 4.1 percent to only 3.1 percent. Although the real trade gap for March narrowed slightly, Greenlaw and Wiesman said that weakening American exports will affect GDP.

Questions

1.	Define a trade deficit. How do trade deficits differ from budget deficits? How are the two similar?
2.	With the trade deficit growing, do you favor protecting American manufacturers from foreign imports? Why or why not?
3.	Discuss why borrowing to pay for the deficit results in transfer of ownership of American assets to foreign investors.

Source

Jennifer Bayot, “Trade Deficit Surged to Record $61 Billion in February”, The New York Times Online, April 12, 2005