In my research to answer this question, I have come upon many different opinions and theories. What I have learnt is that it is not simple answered by Yes or No. There are quite a few things one has to consider, particularly that this is the United States which holds a very unique position in the world economy. In general one can say that Countries rarely import the exact amount they export, so a trade deficit is very common. A few countries ( i.e. Japan, Russia, Saudi Arabia) that are exporting natural resources for example oil, or industrial goods that are in high demand by other countries, experience a surplus – or with other words a positive balance of trade.
On the other hand, the United States’ economy relies on demand – if the economy grows, the demand grows, therefore import grows. I learnt that if you put this fact together with the fact that the U.S. has yearly a negative personal saving rate, what you get is an increasing trade-deficit.
Another theory that I have researched is the concern that a trade deficit, will reduce a country’s GDP, which can cause an economic crisis – which is a logical thought. But when I looked at the U.S. Trade deficit in comparison to the GDP, i could see that although the trade-deficit increases, the GDP increases as well. So, although logically the GDP should decrease as we are importing more goods that are in demand, the actual number does not correspond with this theory.
Additionally, the American labor force is generally highly skilled, cutting imports would mean that those imports would need to be produced in the U.S., resulting in a prize increase and inflation. A very good example for the increase in prize – as discussed in class- would be Apple’s IPhone which prize would possibly ten fold when produced in the U.S. and not China.
In conclusion one can say that when the U.S. imports inputs for a significant less amount that it would cost to produce those inputs domestically, the final product can be purchased for a lower price.
The nation’s currency value is another argument. As U.S. companies purchase goods from foreign countries, they have to exchange foreign currencies into dollars to cover their cost. By exchanging large amounts of foreign currency, they are increasing the prize of the dollar. Given America’s large trade deficit, the value of the dollar should be low. A reason for why it is not, is America’s position in the world. Not only is America the largest economy but it’s currency is also the world’s reserve currency.
A consistent trade deficit can have devastating consequences for a country’s economy, including employment and fall of currency value. Yet the U.S., holding a unique position in this world has proven this argument wrong. Further, cutting imports would increase prices of products and increase inflation.