TRADE DEFICIT

A trade deficit is a condition in the balance of trade between a country's exports and imports. If the value of a country's imports exceeds the value of its exports, then that country is said to have a trade deficit. When the value of a country's exports exceeds the value of its exports, then it has a trade surplus. Trade deficits and surpluses may be measured in terms of the international trade between two nations, or between one nation and the rest of the world.

For the United States, the balance of international transactions is reported on a regular basis in the monthly Survey of Current Business by the U.S. Bureau of Economic Analysis in the Economics and Statistics Administration of the U.S. Department of Commerce. The current account balance of U.S. international transactions consists of four types of transactions: merchandise, services, investment income, and unilateral transfers., When the current account balance is positive, the United States has a trade surplus. When it is negative, there is a trade deficit.

While the Bureau of Economic Analysis reports on the four major categories of international transactions to determine the current account balance for the United States, oftentimes discussions of the current U.S. trade deficit do not take all four categories of transactions into account. In some discussions, the trade deficit is cited only as the balance of trade in merchandise, or goods. In other cases, the trade deficit refers to the balance of international trade in goods and services. Adding to the confusion is the fact that the Department of Commerce reports several versions of the trade deficit, including several revisions, before the most definitive number is released.

Nevertheless, the current account balance as reported by the Bureau of Economic Analysis also includes international transactions in investment income and unilateral transfers. In this context investment income includes interest paid abroad to foreign investors and interest received by public and private sectors in the United States from foreign sources. Unilateral transfers include outflows for net U.S. purchases of foreign securities and inflows for net foreign purchases of U.S. securities, U.S. banks' claims against foreigners and liabilities to foreign sources, and net outflows for U.S. direct investment abroad and net inflows for foreign direct investment in the United States. All of these transactions affect the current account balance.

Looking at the recent history of the U.S. trade deficit in terms of all four categories of international transactions, the U.S. trade deficit peaked at $168 billion in 1987, when the dollar was seriously overvalued. An economic recession followed, and by 1991 the current account balance showed a deficit of $4.4 billion. From 1992 to the end of the decade the trade deficit swelled from $56 billion to a projected $236 billion for 1998 and $300 billion for 1999. For 1997 the trade deficit was reported to be $155 billion, consisting of a $198 billion trade deficit in goods, a $88 billion trade surplus in services, a $5 billion deficit in investment income, and a $40 billion deficit in unilateral transfers.

The $5 billion deficit in investment income for 1997 was the first deficit in that category in decades. It meant that for the first time in decades foreign investors received more payments on their investments in the United States than U.S. investors received on their investments abroad.

In terms of international trade in goods and services only, the United States enjoyed a rising trade surplus in services and experienced a rising trade deficit in merchandise during the 1990s. The surplus in services increased from $27 billion in 1990 to $88 billion in 1997. Trade in services is reported in seven categories, including travel, royalties and license fees, education, financial services, professional services, military sales, and telecommunications trade.

In terms of international merchandise trade with specific countries, the United States has a trade surplus with some countries and a trade deficit with others. From 1991 to 1993, the United States had an increasing trade deficit in goods with Canada, Germany, Japan, Asia (excluding Japan), and China. For the same period, the United States had a merchandise trade surplus with England, Latin America, and Mexico. Merchandise trade with Western Europe went from a surplus in 1991 and 1992 to a deficit in 1993.

A variety of factors determine the size of a country's trade deficit or surplus. Since the balance of trade is measured by the value of imports and exports, the quantity of trade as well as its price affects the size of a particular trade deficit or surplus. When a country's currency is weak, for example, exports are valued lower and imports cost more, thus tending to increase the size of a trade deficit and reduce the size of a trade surplus.

The strength of a country's economy as well as the condition of the international economy also affect trade deficits and surpluses. When there is a worldwide recession, with a weakening of many countries' economies, there is a reduced demand for a given country's exports. A lower international demand for exports tends to increase a country's trade deficit. When a country's domestic economy is expanding, then that economy's demand for exports tends to increase, also tending to increase a country's trade deficit. Thus, an increasing trade deficit could be the result of a growing domestic economy, a worldwide recession, or a weak currency.