The U.S. trade deficit
A country's trade balance is the difference between the total value of the goods and services it exports to other countries and the value of the goods and services it imports from other nations.
A negative trade balance -- i.e., a trade deficit -- occurs when the total value of a country's imports exceeds the total value of its exports. To put it another way, a trade deficit is when a country is buying more from the rest of the world than it's selling.
The graph below shows the U.S.'s quarterly trade balance, measured in billions of dollars, from 1992 through 2017:
Source: U.S. Bureau of Economic Analysis.
The U.S. has been running trade deficits at least since the early 1990s and these deficits have been increasing over time (with a significant, but relatively short-lived reversal during the Great Recession of 2007-2009).
In 2017, the U.S. had a total trade deficit of roughly $800 billion dollars.
How does this growing deficit occur?
Source: U.S. Bureau of Economic Analysis.
The above graph breaks down quarterly trade deficits (red bars) into imports (green) and exports (blue) -- the length of the red bar is equal to the length by which the green bar exceeds its corresponding blue bar. The red bars start from the y-axis and point down because imports exceed exports and we have a trade deficit. Three things are clear from the graph:
- The red bars grow in length over time: The dollar amount by which imports exceed exports has been increasing over time (despite a sharp reversal during the Great Recession of 2008-2009): The trade deficit has been increasing.
- Despite this widening gap between exports and imports, the two are tightly correlated.
- Imports, exports and the trade balance are significantly correlated with the health of the U.S. economy: Exports, imports and the resulting trade deficit tend to increase when the economy is growing and decline during periods of recession (the two thick grey bars that run vertically across the graph represent recessions).
Is the deficit really growing?
The first graph we looked seemed to suggest a deficit that was running amok, with nothing to prevent it from getting bigger and bigger ($800 billion isn't chicken scratch!). However, it's worth remembering two things:
- Inflation plays a part in pushing the dollar value of trade deficit up.
- While the dollar value of the trade deficit has increased over time, so has the total dollar value of all final goods and services produced in the U.S. -- the U.S. economy is growing over time.
The following graph shows the quarterly U.S. trade deficit as a percentage of the annualized gross domestic product (GDP). Scaled by the size economy, the trade deficit is less volatile than it first appeared; since 2010, it has stayed within a relatively narrow range of 0.6 to 0.9 percentage points.
Source: U.S. Bureau of Economic Analysis.
Major trade partners: Imports
Source: The World Bank Group.
It's no big surprise to see these names on this list:
- Two of the top five nations in terms of the value of imported goods and services to the United States are the U.S.'s northern and southern neighbors. The three nations form the North American Free Trade Agreement, NAFTA -- see below.
- The other three -- China, Japan and Germany -- are large economies and exporting powerhouses (all run trade surpluses).
Still, the graph highlights the importance of the U.S.'s trade relationships with China, Mexico and Canada; these three nations account for nearly half of all U.S. imports by value.
Major trade partners: Adding exports to the picture
Source: The World Bank Group.
The top importing nations to the United States are also among the top destinations of U.S. goods and services. However, when we add the share of total U.S. exports to the previous graph, one nations stands out for the size of the size of its trade (im)balance:
Chinese imports to the U.S. far exceed the value of U.S. goods and services that flow there, to the tune of a $366 billion trade deficit with China in 2016.
This graph helps to explain why the topic of trade with China is contentious (especially for officials who believe that running a trade deficit with another country automatically makes you the "loser" in the relationship).
NAFTA: A key trade agreement, in force
The U.S. has free trade agreements in force with 20 countries. Most are small trade partners, but the list includes major partners Mexico, Canada and the Republic of Korea.
The most important of these agreements is the North American Free Trade Agreement (NAFTA), which binds the U.S. to its northern and southern neighbors Canada and Mexico. Together, Canada and Mexico accounted for more than a quarter of total U.S. imports and more than a third of total exports in 2016.
NAFTA went into effect at the start of 1994 and saw the progressive elimination of all tariffs, duties and quantitative restrictions to trade by 2008 (excepting those on a limited number of agricultural products with Canada).
In May 2017, the U.S. Trade Representative informed Congress that the Trump administration wants to renegotiate the terms of NAFTA with Canada and Mexico in order "to support higher-paying jobs in the United States and to grow the U.S. economy by improving U.S. opportunities to trade with Canada and Mexico". One of the administration's specific goals: Narrowing the U.S.'s trade deficit with Mexico.
Multiple estimates cap NAFTA's impact on U.S. gross domestic product at a half percentage point per year (at full implementation). That might sound like a very small amount, but, to put this in context, the gross domestic product grew 4.1% on an inflation-adjusted basis last year. The difficulty in discussing NAFTA's merits is that the economic benefits of increased trade tend to be broadly spread throughout the economy, while the "pain" is borne on a narrow basis (by auto industry workers, for example).
TPP: A major trade agreement, withdrawn
The Trans-Pacific Partnership (TPP), a 12-country agreement that originally included the United States, Canada, Mexico and Japan, was meant to supersede NAFTA, in that only NAFTA provisions that did not conflict with the TPP's (or those that are more expansive with regard to trade) would remain in force.
In January 2017, the United States officially withdrew from the TPP. The remaining signatories renegotiated a new agreement, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, based on the TPP's framework, which they signed this month.
Tariffs: Reviled, but resistant
In the construction of the post-second world war international order, there has been a drive to eliminate trade barriers such as tariffs and quotas, through multinational agreements such as the General Agreement on Tariffs and Trade (replaced by the World Trade Organization).
The United States has been a strong proponent of this drive. Since at least the 1980s, neither party has been keen on tariffs, which are a tax on a specific class of imports. However, there have been exceptions. In March 2002, George W. Bush's administration placed a tariff of 8% to 30% on imported steel in order to "protect" domestic steel producers against a surge in steel imports (the tariff was lifted less than two years later). Subsequent studies of this tariff suggest the economic impact was neutral to negative.
The trend favoring increased globalization appears to be reversing under the current administration. In Jan. 2018, the administration imposed tariffs on solar panels and washing machines, and, this month, the U.S. imposed tariffs on steel and aluminum. China is the largest manufacturer of solar panels and the largest exporter of washing machines to the U.S.
