Question

Write a detailed analysis/synthesis about the trade deficit in the U.S. and effects on macro policy.

Answer 1

Introduction :-

To understand the concept from the view point of the United States, it is equally important to realize the meaning of trade deficit.

A trade deficit is an imbalance between the net exports and the net import of goods & services of a country. The United States is well known to be one of the key exporters of goods and services to the entire world and the currency is one of the largest traded ones across the word. Yet the country experiences trade deficit and faces challenges like any major country of the world.

The expenditure being higher than income, indicates that the country is importing more goods into the country or of higher value than the exports done by the country respectively. While some economists rightly view trade deficits as a necessary evil to keep an economy stable, others always advocate a positive trade deficit which in today's time is a difficult task to achieve.

Case Specifics:-

• Employment:-

One of the biggest highlighted points on how Trade deficit impacts the United States is through loss of employment which has been a huge problem for the government. Particularly in the services and manufacturing sector, the government find itself in a challenging position when compared to other countries such as China and India that largely benefit from lower cost of employment.

Numerous jobs have been lost because of high trade deficit in the country because of which government macro economic policy has largely been affected.

• Tariffs & Quotas:-

Another key factor that trade deficit directly impacts on the economy are tariffs and quotas which they need to set up to protect their interests and to discourage imports in certain areas so that the trade deficit can be minimized. The recent developments with Mexico, China and India are indicative of the same.

The United States has always been advocating for free trade within the global community, but on its part has largely suffered because other countries still have high tariffs on Imports. For Example India and China may charge upto 100% in taxes from goods imported from the United States while those sold by India & China were freely allowed into the United States.

Thus, increasing trade deficit has meant that the country has had to take strict measures, and increase tariffs and quotas as part of their macro economic trade strategy.

• Interest Rates:-

To pull back the trade deficit, the government requires money to invest in infrastructure and also needs to encourage industries to come up so that net exports can be increased. For this, the government takes measures as part of the macroeconomic strategy and policies.

For example:- When the trade deficit rises to a level which becomes problematic for any economy, the interest rates on deposits are increase and those on loans are significantly increased to keep the country at a favorable economic position