Trade Deficit & What it Means

What Is a Trade Deficit?

A trade deficit happens when a country’s imports exceed the exports during a given time period.

The Advantage of a Trade Deficits

A trade deficit allows a country to consume more than it produces. Trade deficits can help countries to avoid shortages of goods and other economic problems.

Some countries a trade deficits will correct over time. A trade deficit creates downward pressure on a country’s currency. With a cheaper domestic currency, imports become more expensive in the country with the trade deficit. Consumers reduce their consumption of imports and shift toward more dosmestically produced items. Currency depreciation also makes the country’s exports less expensive and more competitive in foreign markets.

Trade deficits may also occur because a certain country is more desirable destination for foreign investment. The U.S. dollar’s status as the world’s reserve currency creates a strong demand for U.S. dollars. Foreign countries must sell goods to Americans to obtain those dollars. According to the U.S. Treasury Department, foreign investors held over four trillion dollars in Treasuries as of October 2019. Other nations had to run cumulative trade surpluses with the U.S. totaling over four trillion dollars to buy those Treasuries. The stability of developed countries generally attracts capital, while less developed countries must worry about capital.

The Disadvantage of Trade Deficits

Trade deficits can create substantial problems long term. The worst and most obvious problem is that trade deficits can facilitate a type of economic colonization. If a country continually runs trade deficits, citizens of other countries acquire funds to buy up capital in that country. This can mean making new investments that increase productivity and create jobs. However, it may also involve merely buying up existing businesses, natural resources, and other assets. If this buying continues, foreign investors will eventually own nearly everything in the country.

Trade deficits are much more dangerous with fixed exchange rates. With a fixed exchange rate regime, devaluation of the currency is impossible, trade deficits are more likely to continue, and unemployment may increase significantly. According to the twin deficits hypothesis, there is also a link between trade deficits and budget deficits. Some economists believe that the European debt crisis was caused in part by some EU members running persistent trade deficits with Germany. Exchange rates can no longer adjust between countries in the Eurozone, making trade deficits a more serious problem.

The U.S. holds the distinction of having the world’s largest trade deficit since 1975. The U.S. imported and consumed significantly more electronics, raw materials, oil, and other items than it sold to foreign countries.

Press Release May 4, 2021 from the Bureau of Economic Analysis – U.S. Department of Commerce

U.S. International Trade in Goods and Services, March 2021

The U.S. Census Bureau and the U.S. Bureau of Economic Analysis announced today that the goods and services deficit was $74.4 billion in March, up $3.9 billion from $70.5 billion in February, revised.

Deficit:$74.4 Billion+5.6%°
Exports:$200.0 Billion+6.6%°
Imports:$274.5 Billion+6.3%°
(°) Statistical significance is not applicable or not measurable. Data adjusted for seasonality but not price changes
Source: U.S. Census Bureau, U.S. Bureau of Economic Analysis; U.S. International Trade in Goods and Services, May 4, 2021

COVID-19 Impact on International Trade in Goods and Services

The global pandemic and the economic recovery continued to impact international trade in March 2021. The full economic effects of the pandemic cannot be quantified in the statistics because the impacts are generally embedded in source data and cannot be separately identified.

Exports, Imports, and Balance (exhibit 1)

March exports were $200.0 billion, $12.4 billion more than February exports. March imports were $274.5 billion, $16.4 billion more than February imports.

The March increase in the goods and services deficit reflected an increase in the goods deficit of $3.6 billion to $91.6 billion and a decrease in the services surplus of $0.3 billion to $17.1 billion.

Year-to-date, the goods and services deficit increased $83.2 billion, or 64.2 percent, from the same period in 2020. Exports decreased $21.0 billion or 3.5 percent. Imports increased $62.2 billion or 8.5 percent.

Three-Month Moving Averages (exhibit 2)

The average goods and services deficit increased $2.5 billion to $70.9 billion for the three months ending in March.

  • Average exports increased $3.3 billion to $193.3 billion in March.
  • Average imports increased $5.8 billion to $264.2 billion in March.

Year-over-year, the average goods and services deficit increased $27.7 billion from the three months ending in March 2020.

  • Average exports decreased $7.0 billion from March 2020.
  • Average imports increased $20.7 billion from March 2020.

Exports (exhibits 3, 6, and 7)

Exports of goods increased $11.7 billion to $142.9 billion in March.

  Exports of goods on a Census basis increased $11.7 billion.

  • Industrial supplies and materials increased $5.2 billion.
    • Nonmonetary gold increased $3.4 billion.
    • Natural gas decreased $1.7 billion.
  • Capital goods increased $2.9 billion.
    • Semiconductors increased $0.4 billion.
    • Electric apparatus increased $0.4 billion.
  • Consumer goods increased $2.0 billion.
    • Artwork and other collectibles increased $0.4 billion.
    • Gem diamonds increased $0.4 billion.

  Net balance of payments adjustments decreased less than $0.1 billion.

Exports of services increased $0.8 billion to $57.1 billion in March.

  • Travel increased $0.4 billion.
  • Transport increased $0.3 billion.
  • Financial services increased $0.1 billion.

Imports (exhibits 4, 6, and 8)

Imports of goods increased $15.3 billion to $234.4 billion in March.

  Imports of goods on a Census basis increased $15.3 billion.

  • Consumer goods increased $4.5 billion.
    • Other textile apparel and household goods increased $1.2 billion.
    • Furniture and household goods increased $0.9 billion.
    • Toys, games, and sporting goods increased $0.9 billion.
    • Cell phones and other household goods decreased $1.0 billion.
  • Industrial supplies and materials increased $3.7 billion.
    • Other petroleum products increased $0.8 billion.
    • Crude oil increased $0.6 billion.
    • Fuel oil increased $0.6 billion.
    • Finished metal shapes decreased $1.3 billion.
  • Capital goods increased $3.3 billion.
    • Semiconductors increased $1.3 billion.
    • Other industrial machinery increased $0.5 billion.
    • Telecommunications equipment increased $0.5 billion.
    • Civilian aircraft decreased $1.4 billion.
  • Automotive vehicles, parts, and engines increased $2.0 billion.
    • Passenger cars increased $1.0 billion.
    • Automotive parts and accessories increased $0.7 billion.

  Net balance of payments adjustments increased less than $0.1 billion.

Imports of services increased $1.1 billion to $40.0 billion in March.

  • Transport increased $0.9 billion.
  • Travel increased $0.1 billion.

Real Goods in 2012 Dollars – Census Basis (exhibit 11)

The real goods deficit increased $4.2 billion to $103.1 billion in March.

  • Real exports of goods increased $9.3 billion to $148.7 billion.
  • Real imports of goods increased $13.4 billion to $251.8 billion.

Revisions

Revisions to February exports

  • Exports of goods were revised up $0.1 billion.
  • Exports of services were revised up $0.2 billion.

Revisions to February imports

  • Imports of goods were revised up less than $0.1 billion.
  • Imports of services were revised down $0.2 billion.

Goods by Selected Countries and Areas: Monthly – Census Basis (exhibit 19)

The March figures show surpluses, in billions of dollars, with South and Central America ($3.6), Hong Kong ($2.9), Brazil ($1.0), Singapore ($0.6), and United Kingdom ($0.1). Deficits were recorded, in billions of dollars, with China ($36.9), European Union ($16.9), Mexico ($8.4), Germany ($5.5), Japan ($5.1), Canada ($3.1), Italy ($2.9), Taiwan ($2.6), India ($2.2), South Korea ($2.1), France ($1.5), and Saudi Arabia (less than $0.1).

  • The deficit with China increased $6.7 billion to $36.9 billion in March. Exports increased $0.9 billion to $11.3 billion and imports increased $7.6 billion to $48.2 billion.
  • The deficit with Mexico increased $1.6 billion to $8.4 billion in March. Exports decreased $0.6 billion to $22.2 billion and imports increased $1.0 billion to $30.6 billion.
  • The deficit with the European Union decreased $2.1 billion to $16.9 billion in March. Exports decreased $0.5 billion to $20.1 billion and imports decreased $2.6 billion to $37.0 billion.

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All statistics referenced are seasonally adjusted; statistics are on a balance of payments basis unless otherwise specified. Additional statistics, including not seasonally adjusted statistics and details for goods on a Census basis, are available in exhibits 1-20b of this release. For information on data sources, definitions, and revision procedures, see the explanatory notes in this release. The full release can be found at www.census.gov/foreign-trade/Press-Release/current_press_release/index.html or www.bea.gov/data/intl-trade-investment/international-trade-goods-and-services. The full schedule is available in the Census Bureau’s Economic Briefing Room at www.census.gov/economic-indicators/ or on BEA’s website at www.bea.gov/news/schedule.

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