South-Western College Publishing - Economics  
Troubling Trade Deficit
Subject Trade Deficit
Topic International Trade
Key Words Trade Deficit, Exports, Imports, Balance of Payments, Current Account, Balance of Trade
News Story

The Commerce Department reported that the nation's current account deficit increased by $9 billion to a record $89.95 billion in the third quarter. Exports of goods, services and income grew by $10.82 billion to $312.19 billion; however, imports rose much faster increasing by $19.87 billion to $390.93 billion. Teamsters' President James Hoffa has stated that a trade deficit of this magnitude threatens jobs in the United States. The record trade deficit will likely be a matter of concern for the Clinton Administration, which has pushed free trade as a matter of national policy.

The current account measures the trade in goods and services across countries and other income flows such as investment and spending on foreign aid. The deficit in goods increased to $92.15 billion. The U.S. has a surplus in services such as airline and travel, but that surplus decreased to $18.32 billion. Income from U.S. investments abroad grew $2.71 billion to $69.09 billion in the third quarter. Nevertheless, the U.S. current account investment income deficit increased by $4.92 billion. The decrease was due, in part, to interest payments to foreigners that increased by $3 billion. An investment income deficit means that foreigners are earning more on their U.S. investments than Americans are earning overseas.

The record trade deficit may simply be a reflection of the strong economic growth in the U.S. and the lower rates of growth experienced by U.S. trading partners. Many economists believe that the U.S. trade deficit will narrow as the economies of our trading partners grows stronger.

The trade deficit will likely become a political issue in light of the controversy about China's proposed entry into the World Trade Organization. Many feel that further trade liberalization, such as proposed with China, will only worsen this deficit and cost the U.S. economy jobs. There are additional issues, such as human rights and environmental concerns, that have increased opposition to the Clinton Administration proposal.

(Updated January 1, 2000)

1. What is a country's balance of payments?
2. Distinguish between the overall balance of payments, the trade balance, the current account balance and the capital account balance.
3. James Hoffa, head of the Teamster's Union, is afraid that an increasing deficit will cost the U.S. jobs. What is the basis for his concern? Do you agree?
4. Under some circumstances a country may view a balance of payments deficit as a desirable outcome and in other cases as undesirable. When would a country want a balance of payments deficit?
Source Helen Cooper, "U.S. Current Account Deficit Widens to Record;" The Wall Street Journal, December 15, 1999.

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