South-Western College Publishing - Economics  
U.S. Trade Gap Widens
Subject U.S. Trade Deficit
Topic International Trade
Key Words Tariffs, Imports, Exports, and Protectionism
News Story

The U.S. trade gap, measured by the difference between American exports and imports, has risen to $41.8 billion in October. The widening gap is caused by record imports from China, the European Union, and Latin America. Take China alone: The U.S. exported only $2.9 billion in goods and services while importing a record breaking $16.4 billion Chinese goods and services.

As the American economy has finally begun to climb out of the recent recession, imports with other countries have also hit record proportions. The U.S. imported a record $22.3 billion from the European Union in October, a record $13.0 billion from Mexico and a record $7.1 billion from the rest of Latin America.

One concern of the widening trade deficit is the danger of increased pressure in Washington of new trade restrictions. New trade restrictions could lead to higher prices and slower growth for the American economy. Protectionism raises domestic prices in three steps. First, the price of the imported product goes up; second, the higher prices of imports cause some consumers to shift their purchases to higher-priced domestic goods; and finally the prices of domestic goods increase because import competition has declined. Domestic growth will slow as American exports are reduced because of higher prices and the important foreign market is lost. In turn, any expectation of slower domestic growth will turn investors away from the financial market and cause further problems in the economy. "The market realizes the net positive effect of trade with China," said Lara Rhame, a senior economist at Brown Brothers Harriman. "There is a concern that a trade disruption will turn into a financial market disruption."

Daniel J. Meckstroth, chief economist at the Manufactureres Alliance, spoke recently from an industry perspective to say that he does not blame the record imports for the widening trade deficit. "The problem, in my opinion, is not imports," he said. "The problem is the inability to export. We are buying goods from abroad, giving the rest of the world our dollars, but these dollars are not coming back to this country to buy our products."

(Updated February, 2004)

Questions
1.

How will the economy be hurt if American investors turn away from the market because of new trade restrictions?

2. Discuss the notion of protectionism. What are its benefits to U.S. industries? Its drawbacks?
3. If you were an American manufacturer, how would you increase your sales to foreign buyers?
Source Edmund L. Andrews, "Imports don't Deserve All That Blame", The New York Times Online, December 7, 2003 and Reuters, "Trade Gap Wider as Imports Reach New Record", The New York Times Online, December 12, 2003.

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