The United States Merchandise Trade Deficit

The United States merchandise trade deficit has grown tremendously over the past twenty years. The most direct reason I can find for this trend is "The increase in the trade deficit in recent years has been due largely to sluggish demand for U.S. exports and rising demand for imports caused primarily by capital inflows into the U.S. market, slow economic recoveries in other countries, and faster economic growth in the United States" (Nanto & Lum, 2006). Let's first examine the true meaning of the merchandise trade deficit. The merchandise trade deficit is "the difference between exports and imports of goods" (Sawyer & Sprinkle, 2007, p. 267). It has been predicted that in 2007, the deficit will rise to $888 billion, but then decline somewhat in 2008 (Nanto & Lum, 2006).

The current account deficit is a major problem because this may cause a devaluation of the United States dollar (Nanto & Lum, 2006). If this happens "U.S. interest rates would have to rise to attract more foreign investment, financial markets could be disrupted, and inflationary pressures would increase" (Nanto & Lum, 2006). This is a problem that needs to be addressed or the country as a whole, in terms of business and citizens, would suffer immensely.

The trend of international investment position of the United States is problematic because the merchandise trade deficit can mainly be "accounted for by trade with China, Japan, Canada, Mexico, and Germany" (Nanto & Lum, 2006). The following chart is a representation of the total United States trade in terms of contributors.CountryCanadaMexicoChinaJapanPercentage Contribution to United States Trade 20%12%10%8%

(Nanto & Lum, 2006).

"The current-account balance summarizes a country's current transactions with the rest of the world, which include trade, income from international investments, and transfers" (Congressional Budget Office, 2004). Therefore the current account balance is directly related to the country's business cycle. The current account has three main parts: trade in goods, net investment income, and net unilateral transfers (Congressional Budget Office, 2004). "The balance of trade (exports minus imports) accounts for virtually all of the current-account balance" (Congressional Budget Office, 2004). The current account is affected by how much United States citizens spend and what they earn (Congressional Budget Office, 2004). When the income is greater than spending, then the excess produced goods are purchased by foreign countries, resulting that the United States current account balance is positive or surplus (Congressional Budget Office, 2004). When the spending of the United States citizens exceeds what they earn, the difference of goods was purchased from foreign markets, resulting in a current balance deficit (Congressional Budget Office, 2004).

A country's net financial inflow or income and the current account are directly related to one another. This is a proper explanation of how the net financial income affects the current account:

"When income in the U.S. economy increases, consumers and firms generally demand more imports, and the increase in their purchases of domestically produced goods and services also creates a greater demand for imported materials and components.