2016-03-10 / Business News

MONEY & INVESTING

The large trade deficit is not necessarily a bad thing

I really can’t stand almost everything that is said in political debates with regard to the economy, as most of it is just grandstanding at best and downright lies at the worst. However, one hot button political issue is true and is getting truer by the month — Americans are buying more and more stuff made by people who are not Americans. Most politicians and want-to-be politicians will tell you that this is a bad thing, but I would take issue with that.

Regardless of how you feel about this, last week the latest trade deficit figures came out and it was a huge number. In January, the U.S. imported $45 billion worth of goods more than it exported to other countries. And that is only for one month. So why was our trade deficit so large, and is this really a bad thing?

The primary reason for the $45 billion differential between imports and exports is that exports slumped 2.1 percent to $176.5 billion in January, the lowest level since 2011. The drop was caused by a variety of factors. First, the strong dollar makes U.S. goods more expensive to foreign buyers.

This will continue to be a strong headwind for U.S. multinational companies in the months ahead. Second, many countries outside of the U.S. are economically struggling. Many have negative growth and as a result, consumers within those counties are buying fewer goods and services. Finally, many international governments are giving special incentives and subsidies to their domestic manufacturers to spur growth, making U.S. goods less competitive overseas.

But before we come to the conclusion that foreign manufacturers are flooding the U.S. with their goods while blocking American products (as many politicians would like us to believe), it is important to note that imports were also down in January, by 1.3 percent. This can be a warning sign for our economy as the strong US Dollar makes international goods “cheap.” A weak import number indicates that U.S. consumers and businesses are not readily spending and maybe our economy is not as strong as we would like.

So is a trade deficit a bad thing? As with most complex issues, the answer is “it depends.”

On one hand, a large trade deficit caused by strong imports may be a positive thing, as it shows that the U.S. is consuming a lot of goods and services. This is indicative of a strong economy.

On the other hand, a large trade deficit caused by a lack of exports is not very positive. It shows that either foreign governments are blocking the importation of our goods or that people and companies in those other countries do not desire them.

Is there a solution for our large trade deficit?

There is an easy solution to it — put massive tariffs on all imports. While this would solve one “problem,” it would also result in other countries placing tariffs on U.S. goods, international trade grinding to a halt, and almost certainly a global depression.

More beneficially, the easing of quotas, elimination of government subsidies, stabilization of exchange rates, and fair taxes across countries should boost exports and greatly benefit the U.S.

That is why trade pacts typically spur growth and benefit all countries.

But in the meantime, large trade deficits have been around for decades and will continue far into the future. And that doesn’t bother me one bit. ¦

— Eric Bretan, the co- owner of Rick’s Estate & Jewelry Buyers in Punta Gorda (a buyer and seller of estate jewelry and diamonds), was a senior derivatives marketer and investment banker for more than 15 years at several global banks.

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