Abstract: The recent announcement by the U.S. Commerce Department that in August,
the United States recorded its largest trade deficit in 14 years drew mixed reactions from
analysts and economists. Some voiced concern that the trade deficit would represent a
drag on the economy, while others viewed the announcement more optimistically,
suggesting that while the size of the deficit remains a concern, it is also an indication that
the United States may be seeing the start of a much-needed economic recovery.
Following the COVID-19-prompted global shutdown, which sent countries around the
world into economic freefall, some, like the United States have begun to claw their way
back. Those looking at the numbers released by the U.S. Commerce Department note that
the rise in imports indicates greater confidence by both companies and consumers. They
caution however, that the slower rise in exports suggests that other countries may not be
recovering as quickly as the United States, a situation that will be problematic the longer
it persists.
Notes: The U.S. trade deficit , often used as a bell weather of sorts for the health of the
U.S. economy marked a new milestone recently with the announcement from the U.S.
Commerce Department that the U.S. trade deficit for August was as large as it has been
for 14 years. According to the Commerce Department, the trade deficit for August stands
at $67.1 billion, up nearly six percent and the widest it has been since 2006. Generally,
reactions to news that a country has a very high trade deficit are voices of concern and
worry that that a country is heading toward economic problems . Indeed, a country that is
spending more on imports than it earns on exports is often faced with weaker domestic
industries and fewer job opportunities. This time however, reactions to the announcement
that the trade deficit had widened were more mixed as some suggested that the trade
deficit could represent the start of economic recovery .
When. in the first quarter of 2020, the global economy shut down to slow the spread of
COVID-19, virtually everything stopped. International trade came to a screeching halt as
factories shut down, cargo ships remained in port, and cargo planes were parked on
runways. While many people made the rapid transition to being home-based workers
conducting their business and connecting with colleagues via Zoom and other web-based
conference platforms, millions of people around the world were laid off or lost their jobs
altogether as restaurants closed, tourism came to a standstill, and retail moved to online
shopping. Now though, some economists looking at the recently released data on U.S.
trade see the beginnings of a comeback, and note that while the trade deficit should still be a point of concern, in a world still experiencing the fallout from a deadly, and rapidly
spreading virus, there are signs of economic hope.
A closer look at the figures released by the Commerce Department reveals that imports
increased just over three percent, while exports increased a little more than two percent.
While the trade gap with China fell by $1.9 billion, the United States continued to record
trade deficits with other big trading partners including the European Union and Mexico.
Though the numbers still reflect that Americans are buying more from their trading
partners than they are selling, there is reason for optimism as some economists point out
that rising imports suggest the U.S. economy is getting back on track. Manufacturers are
importing raw materials and parts, and consumer confidence is high enough that they are
also contributing to the increase in imports. Slower growth in exports may suggest
however, that the economies of U.S. trading partners are recovering more slowly, which
could be problematic especially if the expected second COVID-19 wave forces counties
to once again, close their economies. One interesting aspect of the global pandemic has
been rising demand for video conferencing software like Zoom . For the United States, a
technology leader, at least in this category, the COVID-19 pandemic has been an
unexpected bonanza.
Discussion Questions:
- The numbers released by the U.S. Department of Commerce show the U.S. trade
deficit widened in August to a point not seen since 2006. What is a trade deficit and why
does it matter to the health of an economy? Some economists view the current trade
deficit as an indication that the U.S. is leading the world in economic recovery following
the global shutdown related to the COVID-19 pandemic earlier in the year. What will
happen to recovery in the United States if other countries fail to get their economies
going again? - Discuss the theory of comparative advantage as it relates to U.S. exports. Is there a link
between economic recovery in the United States and comparative advantage in products
like video conferencing software, a product for which demand has surged in the wake of
the pandemic? - How might Adam Smith view the recent announcement by the U.S. Commerce
Department? Would he view the widening trade gap with optimism or with pessimism?
Explain.
Sources: FT.com: US trade deficit in August was widest in 14 years; Reuters.com U.S. trade deficit jumps to largest in 14 years in August