Question

Robert Solow once jokingly noted, “I have a chronic [trade] deficit with my barber, who doesn’t buy a darned thing from me.” Is this a problem? Why or why not? How does this relate to the U.S.–China, U.S.–Mexico, and U.S.–Japan trade deficits? EXPLAIN

Answer 1

Solution

Yes,having a chronic deficit with any country is a problem.Because over time,the problem only deepens further affecting the country with the negative balance of trade.By definition ,Trade is an exchange of goods and /services between 2 countries in such a way that both the countries would benefit.In the case of chronic deficit,only one country that is having a positive balance of trade is purely benefitting,whereas there is ALMOST no use for the other country since it's exports are very minute when compared to its imports.

Too much of trade deficit is an indication of incompetency of the sectors of the importing country.

Too much trade imbalance with any country also affects the financial status of the importing country as there is a possibility of it's currency to get undergo a considerable de-valuation with respect to that of it's trading partner.

As the imbalance increases,the terms and/or conditions of trade become more favorable to the exporting country.

U.S - China

This is purely an example of chronic trade deficit.The US imports from China are very huge when compared to it's exports to China.According to a Commerce department report,the US's Trade gap with China rose to $419.20 Billion in 2018 from $375.50 Billion during 2017.This means The U.S imports from China are larger than it's exports to China by $419.20 Billion.

US-Mexico

There is a trade deficit between the US and Mexico also but the quantum is much lesser than that of US-China.According to the Office of US Trade representative,it stands at $72.70 Billion during the year 2018.However,in the case of only services,the US maintains a trade surplus of $8.80 Billion with Mexico.

Mexico is both the 2 nd largest export market and also 2nd largest supplier for the US

So,this trade deficit is some what balanced in nature when compared to that of US-China Trade deficit.

US-Japan

As of 2018,The US 's trade deficit with Japan stands at $67.62 Billion .It improved slightly from $68.875 Billion in 2017.While it's exports to the Japan stood at $74.96 Billion for the year 2018,it's imports stood at $142.59 Billion.Eventhough the quantum trade between the US and Japan is lesser than that between US-China and US-Mexico,the nature of trade deficit of US-Japan is much chronic when compared to that between U.S - Mexico.