Balancing the U.S. Trade Deficit Is No Easy Task

I have talked about the rising trend of the U.S. trade deficit in the past. While the government and many U.S. manufacturers may not like it, the American consumer is clearly benefiting from lower prices at the cash registers. The rising trade deficit remains a very hot issue in Washington.

Washington is clearly not happy about the release of U.S.-China trade data that showed the U.S. trade deficit with China at an all- time high of $214 billion as at the end of November, well ahead of the $202 billion reported for all of 2005.

The Bush administration is clearly in the hot seat. While free trade on a global basis is desired, the administration continues to face criticism in its dealings with China.

Pressure is mounting on Beijing to allow more flexibility in the yuan, which recently traded at a record post-revaluation high of 7.7935 to the dollar. U.S. Treasury Secretary Hank Paulson will try to persuade China to allow the yuan to strengthen, but, if this does not materialize by mid-year, speculation is that Congress will go ahead and enforce higher tariffs on Chinese imports. Of course, the problem with this is that the move would also increase the price of many goods in the U.S., thereby threatening to slow down key consumer spending and reduce disposable income for Americans, especially those in lower tax brackets who benefit from cheaper goods.

As I’ve said in the past, there is a tradeoff here. The unfortunate loss of jobs in the U.S. manufacturing sector is not easy to accept, but, at the same time, consumer hungry Americans are paying less for many goods, including clothing, electronics, and food. This also helps many U.S. businesses. Washington must not lose sight of this when working on its trade policies.

The strategy to control the trade deficit will need to be carefully thought out. Washington must balance the trade deficit with the lower costs paid by American consumers.