Are Trade Deficits Bad?

January 27, 2017

 

Trump often cites a $60 billion trade deficit with Mexico that he blames on a bad deal — the NAFTA (The North American Free Trade Agreement enacted in 1994 that reduced and then eliminated export/import taxes between Mexico and the U.S.) 

According to the U.S. Office of the U.S. Trade Representative website, the U.S. trade deficit between the U.S. and Mexico was $49 billion in 2015. [http://bit.ly/1UESxnF] 

What this means is that Mexico is exporting “more” goods and services into the U.S. than we are towards Mexico. In 2015, Mexico exported $316.4 billion into U.S., (which means the U.S. companies “paid” Mexican companies that much money). We exported $267.2 billion into Mexico in 2015. So that leaves us a trade deficit of $49.2 billion.

It sounds bad, so I Googled, “Are Trade Deficits Bad?” — and read two interesting articles. I’ll link them below. Basically, trade deficits aren’t always a bad thing, as it can mean the U.S. economy is strong with various U.S. businesses able to “buy” from other countries.

A trade deficit is a sign that American consumers are “buying” the things that are imported here (have you ever bought anything that was made in China?) — maybe you buy it because it’s cheaper — and by doing that, U.S. companies make profits, so we buy more and make more money. More richer Americans — but this can mean less jobs for people who depend on manufacturing and making goods — which was one of Trump’s many campaign points. 

So a trade deficit isn’t always bad — for example, the U.S. had a trade surplus during the Great Depression and a very low trade deficit in 1991, around the time there was a recession. So a trade deficit isn’t always bad, and that’s something new I learned today. 

But if we “get tough on trade” and impose or increase tariffs on other countries to import here, it can cause the cost of imports to increase, which makes things more expensive, which means U.S. businesses might not make the same kind of investments and profits, which will have an impact. It’s a ripple effect. 

Mexico is only the first country Trump has targeted on trade with the 20% border tax (import tax). We know he’s already talked plenty about China, and if the U.S. wants to do something drastic with them, it can have a big impact on the world economy, it might benefit China, or it might benefit us. Can companies that have been using foregin labor survive? There are a lot of possible scenarios and questions. 

During Trump’s speech today, he said he wanted to do one-on-one deals with various countries — and if they didn’t give a good deal or refused to cooperate, the U.S. would send them a 30-day notice of termination and use that as leverage to renegotiate. 

Tomorrow Trump will meet with Theresa May, the UK’s PM. Trump said he will negotiate with Thersea by himself — since the Senate have not yet confirmed his commerce secretary, Wilbur Ross. 

https://www.cato.org/.../are-trade-deficits-really-bad-news
http://www.wsj.com/articles/trade-deficit-myths-1433804035
https://www.washingtonpost.com/.../the-smart-way-to.../...

 

 

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