trade deficits

trade deficits - Economist.com Page 1 of 3 Shrink-proof Sep...

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Shrink-proof Sep 18th 2003 From The Economist print edition Why America's deficit is hard to turn around IF FOREIGNERS lose enthusiasm for American assets, they simply click on a mouse. Capital markets are the most liquid and efficient markets in the world; billions of dollars can shift at the touch of a button. The problem is that the other side of America's balance-of-payments ledger—the world of imports and exports—is much more sluggish. According to economics textbooks, shrinking an external deficit should be straightforward enough. For the current-account deficit to shrink, the trade deficit must fall, which means that America must import less and export more. That, in turn, means raising foreigners' appetite for American goods and services relative to Americans' own demand for them. There are two main routes. Either overall spending by foreigners rises relative to American spending as other economies perk up, or (more painfully) America's economy slows down. To help things along, Americans should shift their spending towards goods produced at home. A cheaper dollar will encourage them to do that while boosting American exports at the same time. The most effective engine of adjustment would be an autonomous increase in demand abroad for American goods, perhaps through faster growth in customer countries. In practice, though, it tends not to happen that way. The typical current-account adjustment, according to the IMF study cited earlier, is associated both with a sizeable fall in the exchange rate and with a drop in output in the adjusting economy. Ms Freund's study for the Federal Reserve reached the same conclusion, suggesting that a sustained export surge is the most important factor in turning round a deficit. Although America finds it easier than most countries to fund its external deficit by sucking in foreign capital, its economy has a number of characteristics that make it much tougher than elsewhere to shrink that deficit. The first problem is the sheer size of it, and the huge gap between imports and exports (see chart 7). At just under $1.4 trillion in 2002, America's imports are worth almost 50% more than its exports ($974 billion). Closing the gap means exports have to grow much faster than imports. If imports were to increase by, say, 4% (about half their average growth rate since the mid-1990s, and consistent with modest economic growth in America), exports would have to rise by 11%, more than 1.5 times the average of the booming late 1990s, to reduce the trade deficit to $300 billion over two years. Moreover, Americans have a particular penchant for imports. Back in 1969, two economists, Hendrik
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This note was uploaded on 04/26/2008 for the course ECN 115 taught by Professor Jia during the Summer '06 term at Northeastern.

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trade deficits - Economist.com Page 1 of 3 Shrink-proof Sep...

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