U. S. Trade Deficit

An improvement in trade performance does not necessarily mean that we are seeking to turn a trade deficit into a surplus - U. S. Trade Deficit introduction. Performance might be measured by other criteria – for example: (a) A rising share of world trade in exports of goods and services (b) A higher trend rate of growth of exports Short-term improvement in trade performance: Cyclical Factors Some of the overall trade deficit is due to the strength of domestic demand for goods and services.

If and when the economy enters a slowdown phase, the growth of imports will fall, and this should provide an element of correction for the trade deficit. Higher Interest Rates – will act to slowdown the growth of consumer demand and therefore lead to cutbacks in the demand for imports. Fiscal policy (i. e. increases in direct taxes) might also be used to reduce aggregate demand.

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The risk is that a sharp fall in consumer spending might lead to a steep economic slowdown (slower growth of GDP) or an full-scale recession – as shown in the AD-AS diagram below. China is the largest foreign holder of U. S. debt. Despite this fact, many politicians are talking tough (perhaps tougher than they should be) about China’s artificially low currency and how that affects trade relations between the two world powers.

With China President Hu Jintao now visiting the United States and set to meet Obama at the White House Wednesday, it seems likely that the topic of the undervalued yuan will come up. Hopefully though, Obama will be more diplomatic than those who are calling for the U. S. to crack down even more on China for its currency manipulation. Let’s face it. China is kind of like our landlord. Or, if you prefer a more menacing term, our loan shark. We should tread carefully.

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