Economic Snapshot | Trade and Globalization

Manufacturing problems drive U.S. trade deficit

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Snapshot for January 24, 2001.

Manufacturing problems drive U.S. trade deficit
The U.S. has developed steadily growing trade deficits over the past 20 to 25 years. During this period, the manufacturing balance declined steadily (as shown in the figure below). In the third quarter of 2000, this deficit reached 4% of gross domestic product (GDP). Although the overall U.S. trade deficit improved slightly in November 2000 (not shown), this does not reverse the trend of steadily growing trade deficits. Trade deficits usually decline sharply as the economy contracts, as seen in the improvements in the manufacturing trade balances between 1973-75, 1979-81, and 1989-91 (all periods of slowing or negative growth in the overall economy).

Major components of the balance of trade in goods and services as a share of GDP

The U.S. trade deficit in oil products peaked in the late 1970s, after the oil crises. The oil deficit then improved for almost two decades thereafter because of improvements in energy efficiency and conservation. Recent oil price increases have reversed this long-term trend, and the U.S. may be headed for another period of growing oil deficits.

As for services and other commodities (including farm products), the United States had a surplus during the 1990s that ranged between 1% and 2% of GDP. However, that surplus was barely large enough to pay the U.S. oil bill. Thus, it will be difficult, if not impossible, to improve the trade deficit without a huge increase in manufacturing exports, a fall in imports, or both. Remedying the trade imbalance in manufactured goods is clearly the key to balancing U.S. trade.

Data Source: U.S. Department of Commerce, Bureau of Economic Analysis, National Income and Product Accounts (quarterly), and analysis by Wynne Godley of the Levy Institute. Also, see the final report of the U.S. Trade Deficit Review Commission, Chapter 3 — Democratic Commissioners Viewpoint [PDF] from The U.S. Trade Deficit: Causes, Consequences, and Recommendations for Action.

This week’s Snapshot by EPI economist Robert E. Scott.

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