America’s Trade Deficit: Causes, Effects, and Solutions

In June 2021, the U.S. reached a record high trade deficit of $75.7 billion. Trade deficits occur when a country’s imports exceed its exports, resulting in a net loss of cash inflow. The U.S. has dealt with a number of trade deficits in the past, but this most recent deficit could disrupt the economy at a large scale.

In 2020, the U.S. trade deficit grew rapidly. This led to many job losses, specifically in manufacturing plants. In 2021, the trade deficit caused many major ports to become congested, forcing ships to anchor offshore while waiting for port space to unload goods.

Many have attributed the growing trade deficit to a combination of the effects of the COVID-19 pandemic and failed U.S. trade policies. COVID-19 has decreased demand for imports and services, which increased the trade deficit. Meanwhile, U.S. trade policies centered around China, the country which contributes the most to the deficit as the largest exporter the U.S., resulted in a trade war, with each country imposing tariffs on the other.

The current U.S. trade deficit, in many ways, harkens back to the trade deficit of 1980. During the previous trade deficit, the U.S. was referred to as “the import market of last resort.” The deficit steadily decreased wages starting in 1979, and many firms were forced to close. Most firms that were shut down were unable to reopen, and many people in manufacturing lost their jobs.

Not all trade deficits are bad, however. For a short period of time, a trade deficit allows a country to consume more than it produces, preventing shortage of goods. For example, the U.S. recovered from the economic effects of COVID-19 faster than other countries because the trade deficit allowed them to get resources to jumpstart their economy. Small trade deficits can occur if a country is well-suited for foreign investment, and these deficits often correct themselves over time. The current trade deficit, however, is significantly larger than those of past decades, which has resulted in many of the economic problems seen today.

A theory in economics called the “twin deficit hypothesis” may help explain the cause of such a large trade deficit. The theory says that a large budget deficit—when a nation’s expenses exceed their revenue—is correlated with a large trade deficit. The reasoning behind the theory is that a large budget deficit can come from government tax cuts. A tax cut means taxpayers have more money, which is often spent on imported goods and services, increasing the trade deficit.

Not all hope is lost, though, as there are many potential solutions to the current trade deficit. The U.S. could invest in infrastructure and energy efficiency to rebuild domestic manufacturing, and the budget deficit could be amended. Improving U.S. trade policies by working with other countries and assessing how competitive the U.S. is in certain markets could also help decrease the substantial trade deficit. More aggressive approaches include forcing other countries to accept more imports and enforcing policies which would allow products from the U.S. to be more accessible to consumers in developing countries. Ultimately, however, it is up to the government to form a plan to address the most critical causes of the deficit, as well as mitigate its effects.

The U.S. trade deficit creates serious problems for the both country’s economy at large and its individual citizens. Many effects of the deficit, such as job loss, have already been felt, and a failure to decrease the deficit would mean more severe consequences down the line. Now it is up to the government to reverse years of accumulating trade deficits and to stabilize the economy.

By: Eric Wang