Imports, Exports, and Foreign Capital

The U.S. trade deficit soared to a new record high of $489.4 billion in 2003, according to a government report. The growing trade deficit has caused many in Washington and around the country to worry that economic problems may arise as a result. The trade deficit is a measure of the difference between the value of foreign goods purchased by Americans and the value of American goods sold overseas. The new numbers emphasize the fact that we continue to buy much more from abroad than we sell abroad.

One impact of the rising trade deficit in the U.S. may be a reconfiguration of the job market. A trade deficit reduces aggregate demand for domestic goods and places a negative influence on employment and output. Robert E. Scott, director for trade studies at the Economic Policy Institute, said "As a consequence of the trade deficit, people are being pushed out of well-paying jobs with benefits in manufacturing and into the poor-paying service jobs, often with no benefits."

Financial analysts worry that the U.S. is developing too much reliance on foreign capital to pay our debt. One way to finance the deficit is by borrowing from foreign investors and the U.S. has been borrowing record amounts in that arena. "We are developing a great reliance on foreign capital to pay for our debt," said Richard J. DeKaser, an economist at National City Corporation, "and it is clear that foreigners are losing confidence; that there is a greater reluctance to finance our trade deficit."

Alan Greenspan, chairman of the Federal Reserve, agrees. In a report to the House Committee on Financial Services, he stated that, "given the already substantial accumulation of dollar-denominated debt, foreign investors, both private and official, may become less willing to absorb ever-growing claims on U.S. residents."

The final impact of the growing trade deficit has yet to be determined, but historically, trade deficits hurt those industries most highly dependent on exporting, and it is precisely those industries that could see a reconfiguration of the job market. Additionally, if foreign investors turn cold to continued U.S. borrowing, America may have to turn to the second avenue for financing the trade deficit: selling off assets--an alternative that most would like to avoid.

(Updated April, 2004)