The Commerce Department said Wednesday that the United States last year posted an $891.2 billion trade deficit in merchandise, the largest in the nation’s 243-year history. That’s a scary-sounding number, but what exactly does this mean for your business?
First, a bit about that number. $891.2 billion is just the deficit in goods traded, and it does not include the $270.2 billion surplus in services traded. But that still leaves a goods and services deficit valued at 3.0 percent of the U.S. gross domestic product.
As important as the value of the trade deficit is the reason for its growth. At the end of 2018, companies dependent on imports from China contemplated the threatened imposition of new and higher duties at the end of March 2019. Their risk mitigation strategy was, quite naturally, to buy more when they knew goods would be cheaper. Also, a successful U.S. economy and rate hikes by the Fed in the latter part of 2018 have led to a rise in the U.S. dollar. This makes imports cheaper and exports more expensive to our customers.
So do you need to be worried? While economic theory suggests that persistent trade deficits will be detrimental to a nation’s economic outlook by negatively impacting employment, growth, and currency value, the U.S. experience has proven this wrong. Our economy continues to grow in spite of ballooning deficits. Many of the goods imported are used as components in U.S. products, helping us to keep prices competitive. And while accumulating debt to finance imports is not good, with the outflow of dollars from the U.S. to pay for imports comes the opportunity to create jobs through attracting more Foreign Direct Investment and to sell to other countries that now have dollars to spend.