The U.S. Trade Deficit

Danny Ketterman

Mrs. Straub

AP Economics

3 April 2015

The U.S. Trade Deficit

The United States in recent years has had a major problem with their national debt. The U.S. national debt is over 18 trillion dollars which equates to each American owing over $56,000 as their share of the national debt. Why is this so high? In recent years the national deficit, which is the amount of money the country goes in debt per year, has reached over one trillion dollars at its peak and with the U.S. spending as much money on interest on the debt as they are for defense we will only continue to run deficits each year unless we are able to cut our spending.

One large part of the U.S. debt problem is the U.S. trade deficit. The U.S. imports many more goods than it exports. This creates a deficit in the U.S. current account which measures goods and services that are traded. This years trade deficit was over 450 billion dollars. This may seem low compared to the enormous debt that we have, but keep in mind that is the deficit thus it is occurring each year. Beyond that, there are additional costs to this than just the 450 billion dollars. This deficit shows that we are not self sufficient in making our own products, it shows that jobs may be being sent abroad and it shows that there may be an imbalance with which countries have a comparative advantage because of their costs of production. Close to ⅔ of our trade deficit is with the country of China. The reason why we often see that China makes and sends so many products to America, has to do with the fact that China does not have the same wage laws as here in the U.S. In the U.S. our minimum wage laws are much more stricter thus we have a higher cost of production than in China which causes companies to ship their factories abroad to take advantage of the higher margins they will have with this lower cost of production. This allows the Chinese government to not give their citizens a fair wage and it also takes jobs away from the U.S.

So how does a problem like this get fixed? There are many benefits to free trade. Some of those benefits would include the fact that countries can gain output by taking advantage of specialization. The U.S. has had benefits of this in the past, by creating the North American Free Trade Agreement in the 1990’s which allowed free trade between the countries of Canada, Mexico and the U.S. There comes a time however, when action needs to be taken with another country to improve trade. One option I propose is called a protective tariff. This would be an excise tax on products that are made in China, in order to protect from foreign competition. An excise tax is a high tax on a certain product to discourage people from buying that product. For example the U.S. has an excise tax on cigarettes. If we were to tax specific products made in China, this would cause American companies to want to produce their products right here in the United States instead. We would then become more efficient with our resources and not have to import as many goods since we would be making them ourselves.

Our trade deficit would go down, and our employment would go up. This would also cause our employment rate to go up. Even though unemployment has been going down, employment has been fairly flat because people who drop out of the labor force are not counted in the unemployment rate. This however, would fill jobs and increase the labor force before the baby boomer generation begins to retire. If China were to improve its conditions, we would be able to lift the tariff and again take advantage of comparative advantage without having to worry about companies traveling abroad. China gets better workers rights and the U.S. gets less imports and more jobs. Everyone wins.

For more on the U.S. trade deficit check out this video https://www.youtube.com/watch?v=JEQO0PBC5L8

Sources

"U.S. National Debt Clock : Real Time." U.S. National Debt Clock : Real Time. Web. 3 Apr. 2015.

"U.S. Balance of Trade." Tradingeconomics.com. 2 Apr. 2015. Web. 3 Apr. 2015.

"The U.S. Trade Deficit." YouTube. YouTube, 23 Oct. 2012. Web. 3 Apr. 2015.