South-Western College Publishing - Economics  
Trade Troubles
Subject Trade Deficit
Topic International Trade
Key Words Imports, Exports, Exchange Rate, Economic Growth
News Story

The U.S. trade deficit hit another record in March - the third month in a row. The U.S. Commerce Department reported that the trade deficit in March increased to $19.7 billion from a record $19.1 billion in February. Exports increased by $700 million from February to $77.5 billion, but imports grew even faster - up by $1.3 billion from February, to $97.2 billion. For the first three months of 1999, the deficit is running at an annual rate of $222 billion, which is the highest deficit ever recorded.

These latest trade data contain both good and bad news. The increase in exports was the first in five months and a sign that the economies of Asia and Latin America were recovering. The growing gap is also indicative of the health of the U.S. economy compared to its main trading partners. As long as the U. S. economy is vibrant and other economies are dormant, the U.S. trade deficit will continue to grow. Continued growth of the trade deficit in the short run, it is argued, will not be a problem. The U.S. is essentially borrowing from abroad to finance the deficit. As Alan Greenspan, chairman of the Federal Reserve, reported to the House Banking Committee, a growing trade deficit can create a problem in the long run by "creating a significant rise in debt or claims against us by foreigners, which could essentially destabilize our system."

There are no indications that the growing trade deficit will cause the Clinton Administration to abandon it strong-dollar policy. A strong dollar makes exports relatively more expensive at the same time making imports less expensive. Increased imports benefit consumers by creating competition and forcing domestic producers to hold price increases down.

(Updated July 1, 1999)

Questions
1. What is a "trade deficit?" How is it calculated?
2. U.S. officials argue that a recession in the Asian economies is partially responsible for the size of the trade deficit. How will a recovery in these economies affect U.S. exports and imports?
3. What is the relationship, if any, between a country's trade deficit and the relative value of its currency?
Source Richard W. Stevenson, "Trade Deficit Rises Faster Than Forecast," The New York Times, May 21, 1999.

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