Question

What risks does the U.S. face given its recent trade imbalance?

Answer 1

A trade deficit occurs when the value of a country's imports exceeds the value of its exports—with imports and exports referring both to goods, or physical products, and services. In simple terms, a trade deficit means a country is buying more goods and services than it is selling. An overly simplistic understanding means that this would generally hurt job creation and economic growth in the deficit-running country.This view of trade deficits is behind much of the complaints among U.S. politicians about bilateral U.S. trade deficits, especially with China, the country with which the U.S. runs what is by far its largest bilateral trade deficit. That deficit was a prominent campaign theme for President Donald Trump in 2016, and a primary reason he launched a trade war against China after taking office. Trump argued that cutting the trade deficit would create jobs in the U.S. and strengthen the economy.In the simplest terms, a trade deficit occurs when a country imports more than it exports.

To many in the world of economics, though, a trade deficit is about an imbalance between a country's savings and investment rates. It means a country is spending more money on imports than it makes on exports, and under the rules of economic accounting it must make up for that shortfall. The U.S., for example, can do so by either borrowing money from foreign lenders or permitting foreign investment in U.S. assets.This foreign lending and investment can be seen as a vote of confidence in the U.S. economy and a source of long-term economic growth, if the borrowed money or foreign investment is used wisely, such as investment in productivity growth. This was the case with the U.S. for several decades in the 1800s. The money went into railroads and other public infrastructure, which helped the U.S. develop economically. South Korea saw the same kind of productive investment while running trade deficits in the 1980s and 1990s. A strong trade surplus doesn't necessarily mean strong economic growth. Japan, for example, has run a significant trade surplus for most of the past several decades, yet its economy has been stuck in low gear most of that time. Germany, too, generally runs a strong trade surplus but registers mediocre economic growth.

There are concerns that trade deficits slow economic growth, increase unemployment, generate deindustrialization, and raise the risk of economic and financial instability.large trade deficits may signal higher rates of economic growth as countries import capital to expand productive capacity. However, they also may reflect a low level of savings and make countries more vulnerable to external economic shocks, such as dramatic reversals of capital inflows.. For the most part, trade deficits or surpluses are merely a reflection of a country’s international borrowing or lending profile over time. Just as companies borrow to finance investment and purchases, so do countries. country can have a perpetual trade deficit or surplus simply because income payments from investments allow it to finance the country’s desired flow of goods. Far too often, the common wisdom is that large trade deficits signal a fundamentally weak economy, when the empirical evidence suggests that there is no long run relationship between the two. Trade deficits and surpluses are part of the efficient allocation of economic resources and international risksharing that is critical to the long-run health of the world economy. Neither one, by itself, is a better indicator of long-run economic growth than the other.