U.S trade deficit keeps growing?What is the problem?

Most recently, the US government reported that the deficit in 2018 rose substantially to $ 621 billion. Since Trump’s coming to power, he focused on the entire administration in reducing trade deficit. Trump aims to reduce this deficit by making pressure foreign countries to reduce barriers to US exports.
Unfortunately, something is not going well. Trump’s efforts in China and other countries in trade with these countries have not yet yielded the expected results to reverse the overall US trade balance. What’s Not Going ?

Capital inflows are the backbone of trade imbalance. The US trade balance depends largely on how much it spends, wins, saves and invests the country as a whole. Americans collectively spend more than their income, which means that the country’s savings do not cover their investment needs. To distinguish, the country has to borrow from abroad – that is, foreigners have to increase their US dollar assets.

When Trump signed the Law on Tax Cuts and Labor by the end of 2017, it also predicted the growth of trade deficit. In this way, we realize that savings imbalances lead to trade deficits. Together with the top levers on discretionary federal spending, legislation dramatically increased the government’s budget deficit. This widened the gap between domestic savings and investments, requiring greater foreign capital inflows – and a larger trade deficit – to maintain the balance.

In the 1980s, when Reagan tax cuts boosted the dollar and the trade deficit rose sharply, the same story reiterated today. If trade barriers are coming down faster abroad than in the US, should not this help? On the margins, perhaps: US exports may grow in the respective countries. But the growing federal budget deficit has a greater effect. Everyone else is equal, the fiscal stimulus promotes US interest rates, which makes US assets more attractive to foreigners and causes the dollar to appreciate. The strongest dollar, on the other hand, reduces the competitiveness of US exports abroad and increases the competitiveness of foreign imports to the US. The result is a major trade deficit.

The trade balance will depend on how these changes affect the balance between internal savings and investments. Can not the United States only increase tariffs to keep imports out? Again, this may work for specific goods and services, but in general it will only lead to a stronger dollar, lower exports, and a change in a variety of imports. Worse, foreign countries can retaliate with their tariffs, further reducing US exports. And ultimately, the end line does not change:

For economics and American exports, seeking lower trade barriers is a good idea. Removing barriers to trade can lead to greater specialization and economies of scale worldwide, increasing productivity and living standards. In this way, the United States can focus on exporting goods and services where they have competitive advantage. However, this can harm the industries and the particular regions in the short term so it is very important to provide assistance and support for anyone who is affected by these policies. If no such offer is provided, then the supportive policies of such a campaign will fall, because the long-term welfare of the world remains important./Investing.com

 

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