Is living in a trade deficit killing the US economy?
I used to think so. But I changed my mind. Here’s why.
Let’s start from the beginning.
We are often taught, back in school or college, that a fair balance between imports (buying goods or services from abroad) and exports (selling domestic goods or services to other countries) is one of the backbones of a healthy economy.
A scenario where a country imports more than it exports, which is the definition of a trade deficit, is worrisome. It demotivates production, creates shortages, and causes job losses.
With that foundation, I was quick to connect a trade deficit with the economic fallout that has been going on in the US in a post-pandemic world:
highest inflation in years,
interest rates raised (by The Fed),
borderline living under a constant recession threat.
So what evidence persuaded me to reassess my original position?
Learning more details about the US trade deficit history, which has been a constant in our economy dating back to the 1970s.
If we’ve had some truly prosperous years despite being in a trade deficit, how could we only be seeing the effects now?
That was my cue to realize I was looking at the situation from the wrong angle.
A trade deficit doesn’t mean the country is giving its resources away to foreign countries. As a matter of fact, it is a layered process with room for advantages.
For example, a trade deficit can be good at alluring foreign capital to the US economy. When the US imports more than it exports, it entails financial commitments that are prone to attracting foreign investors and lenders who are willing to invest in our soil. As a result, the country can finance public debt, create jobs, and stimulate growth. These operations highlight confidence in our economic strength and stability.
A trade deficit can also give us access to a wider variety of goods and services at lower prices, which is good for consumers and businesses.
Of course, a trade deficit can also create significant threats, such as:
increasing dependence on foreign countries,
and reducing domestic production.
Both of these threats can be mitigated by pursuing smart trade policies between the parties. The policies should be designed and implemented to balance costs and benefits for the US and its trading partners with fairness.
Looking at other strategies, such as a circular economy, another option rises to the table.
A circular economy is a system built to minimize waste and maximize resource efficiency. The way it works is that products and services are designed to be reused, repaired, recycled, or remanufactured.
In principle, a circular economy can:
help reduce import dependence on raw materials and energy,
increase the exports of high-value products and services,
and create new markets and opportunities for innovation while fostering competitiveness.
Overall, I no longer think a trade deficit is the main cause of the US economy’s crisis. It can have positive effects on the standard of living, inflation, and foreign investment. And negative ones on foreign dependence and domestic production.
Moreover, if we were to eliminate the trade deficit, there’s no guarantee our production capabilities would be able to match our needs right away. There has to be a long-term plan overseeing the whole picture and the actors necessary to make that turn.
At the moment, it seems like the better solution is to manage the trade deficit wisely and maximize its benefits.
