Policy Brief
Institutional Affiliation
Date
Trade Deficits and Effects in the Country
Debates as to whether the growth of the trade deficit in the country will lead to the development of negative and positive effects that may be long-term and short-term have been greatly felt with the passing years. The debates highly focus on whether this particular aspect will harm the country’s economy. In 2000, the Senate Committee decided to ask the Congressional Budget Office to carry out an investigation or study of what trade deficit is, its effects in the country as well as its causes. The same committee asked this department to study the effects that some federal policies will have when it comes to a trade deficit. A memorandum was drafted, further providing answers to the questions that had been posed by the Senate Committee.
Free trade, as established after the Second World War, benefited the United States since it led to trade surpluses that focused on an increase in the number of exports when compared to imports. However, in 1970, such surpluses were nowhere to be seen, further leading to trade deficits. An increase in trade deficits was also highly seen in the next two decades. Economists believed that the primary cause behind the trade deficits focused highly on unfair policies that governed foreign trade. However, the primary reason behind the increase of trade surpluses focused more on the balances that existed and focused on investment and saving and the effect of the balance of the two when considering international flows of capital (Pakko, 1999). One important aspect that was highly noted in this particular memo focused on the increase in growth when it came to private investment. A substantial growth had been seen in this particular area, further leading to the production of robust current-account deficits. During the same period, the saving rate was quite low when compared to investment growth. A country’s current account highly focuses on the trade balance, which revolves around imported and exported goods and services, net income, and direct payments (Mann, 1999).
A trade deficit can be regarded as beneficial to the country since the standard of living that will be seen or experienced may be raised. This will further lead the residents of that particular country to have access to a wide variety of services and goods that will be sold at a competitive price. This serves as one of the effects of trade deficits that may be long or short term. A trade deficit will also reduce any threats that will be experienced by the country when considering market inflation. This effect, which can be short or long-term, will lead to lower-priced goods and services.
The negative effect of the trade deficit will highly focus on unemployment. Fewer jobs will be created following a trade deficit since the country experiencing this particular issue will focus more on importing goods rather than exporting goods. Hence, most goods will be assembled and ready for sale. Unemployment falls within the short-term category of negative effects following a trade deficit. A country facing this particular issue will have to outsource services from foreign countries. Workers who worked in companies that have been affected will be left unemployed since no work can be carried out within the organizations. Hence, a trade deficit will force the workers to search for new employment in companies that have not been affected. The long-term effect of trade deficit when considering unemployment will be seen when a trade barrier has been used to reduce the trade deficit. This will be mostly seen when the barrier is broad and high (Krugman et al., 1987).
The second effect focuses on the country’s economy, which will be affected as a result of a trade deficit. The effect sustained by the economy may be positive or negative. Strong economic growth has been seen in the country during periods that the country encountered trade deficits. The primary reason why economic growth was experienced focuses on foreign investment, which increased in the country. However, a strong trade surplus may not contribute to economic growth. Japan and Germany have encountered slow or mediocre economic growth even though the two countries will have a strong trade surplus.
The impact or effect of trade deficit will be similar to the impact the current account will have on the economy as well as the country’s unemployment rate. The effect of the trade deficit on the economy will be a short-term effect rather than a long-term one since only certain periods will experience economic growth. The long-term effect of the current account deficit focuses on liabilities that may not lead to economic productivity (Mann, 1999). Such an effect will affect the company’s economy since the country shall be regarded as insolvent since it cannot repay the foreign funds or investments that had been acquired. The economy may also experience short-term growth if foreign investment is used to promote economic growth through productive yields. The capital account will also contribute to the surplus of liabilities, which may affect the country’s net inflow of capital. The capital account surplus may contribute to unemployment, a long-term effect, and insolvency since the country may be unable to pay its liabilities. The stabilization of trade deficit will lead to the development of positive effects such as a steady economy and a low unemployment rate.
References
Krugman, P. R., Baldwin, R. E., Bosworth, B., & Hooper, P. (1987). The persistence of the US trade deficit. Brookings papers on economic activity, 1987(1), 1-55.
Mann, C. L. (1999). Is the US trade deficit sustainable?. Peterson Institute.
Pakko, M. R. (1999). The US trade deficit and the” new economy”. Federal Reserve Bank of St. Louis Review, 81(5), 11.