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The U.S. trade deficit has risen more or less steadily since 1992.
In 2006, the trade imbalance reached $811.5 billion, an increase of
$20 billion over the 2005 deficit, and a total increase of about
$765 billion since 1992. The trade deficit's growth in 2006 was
largely the consequence of increase of import purchases of nearly
$210 billion, a slight deceleration from import growth in 2005.
Exports in 2006 increased a smaller $162 billion, but this was an
acceleration over the 2005 results. As a percentage of GNP, the
trade deficit in 2006 was 6.1%, a decrease from 6.3% in 2005. The
investment income component of the trade balance moved from a
surplus of $10.3 billion in 2005 up to a surplus of $36.6 billion
in 2006. The large and growing size of U.S. foreign indebtedness
caused by successive trade deficits suggests that the investment
income surplus is likely to soon be pushed toward deficit. The size
of the U.S. trade deficit is ultimately rooted in macroeconomic
conditions at home and abroad. U.S. saving falls short of what is
sought to finance U.S. investment. Many foreign economies are in
the opposite circumstances, with domestic saving exceeding domestic
opportunities for investment. This difference of wants will tend to
be reconciled by international capital flows. The shortfall in
domestic saving relative to investment tends to draw an inflow of
relatively abundant foreign savings seeking to maximise returns
and, in turn, the saving inflow makes a higher level of investment
possible. For the United States, a net financial inflow also leads
to a like-sized net inflow of foreign goods -- a trade deficit.
Absent a major shift in the underlying domestic and foreign
macroeconomic determinants, most forecasts predict the continued
widening of the U.S. trade deficit in 2007, but the rate of
increase of the trade deficit is expected to slow. The benefit of
the trade deficit is that it allows the United States to spend now
beyond current income. In recent years that spending has largely
been for investment in productive capital. The cost of the trade
deficit is a deterioration of the U.S. investment-income balance,
as the payment on what the United States has borrowed from
foreigners grows with its rising indebtedness. Borrowing from
abroad allows the United States to live better today, but the
payback must mean some decrement to the rate of advance of U.S.
living standards in the future. U.S. trade deficits do not now
substantially raise the risk of economic instability, but they do
impose burdens on trade sensitive sectors of the economy. Policy
action to reduce the overall trade deficit is problematic. Standard
trade policy tools (e.g., tariffs, quotas, and subsidies) do not
work. Macroeconomic policy tools can work, but recent and
prospective government budget deficits will reduce domestic saving
and most likely tend to increase the trade deficit. Most economists
believe that, in time, the trade deficit will most likely correct
itself, without crisis, under the pressures of normal market
forces. But the risk of a more calamitous outcome can not be
completely discounted.
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