Is the U.S. Trade Deficit Sustainable?

Is the U.S. Trade Deficit Sustainable?

Is the U.S. Trade Deficit Sustainable?

Is the U.S. Trade Deficit Sustainable?


The United States trade deficit has hit record levels and continues to rise. Is a chronic and widening deficit sustainable or will the dollar crash, perhaps taking the economy with it? If the problem was one of "twin deficits, " why has the external deficit continued to worsen even as the budget deficit narrowed to zero? If US companies are so intensely competitive, why does the external deficit persist? Does the external deficit represent protectionism abroad; will it lead to protectionism at home? This study seeks to answer these perennial questions about the trade deficit. Each chapter presents simple analytical frameworks as a basis for concise, succinct, and clear statements on each major issue. The last section of the book provides an outlook for the deficit and suggests alternative policy courses for dealing with it. Is the U. S. Trade Deficit Sustainable? is designed for the policymaker and general public who are interested in the US role in the world economy, but who need not be expertsin economics. It is also suited for courses in international economics, business, and international affairs.


Forecasters project that the US trade deficit in 1999 will reach about $200 billion, and the current account deficit will be more than $300 billion, or about 3.3 percent of GDP. The trajectory for the year 2000 and beyond exhibits further widening. The current account deficit has not been this large in percentage terms since 1987, when the trade deficit was $153 billion and the current account deficit $170 billion.

The US economy is expected to continue to outperform the rest of. the world in 1999, with an expected GDP growth of at least 3.5 percent, compared to the industrial countries' average of around 2 percent. This divergence in growth rates is eerily similar to what we saw in the mid-1980s, when the United States rebounded from the 1981-82 global recession much more quickly than did its industrial-country trading partners.

The exchange value of the dollar appreciates in response to the higher actual and expected returns that come with robust growth. Accordingly, between 1981 and 1985, the exchange value of the dollar appreciated some 50 percent against the currencies of the major US trading partners. Between mid-1995 and early 1998 the dollar also appreciated, although by a more modest 25 percent.

Along with these similarities between the two periods, might there be another forthcoming? After its substantial run-up, between 1985 and 1987 the dollar depreciated about 50 percent. While it is never easy to explain the behavior of foreign exchange markets, by February 1985 investors' and policymakers' views about the dollar complemented one another.

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