U.S. Trade Balance: Largest Trade Deficit Since 2008

U.S. Trade BalanceAt 8:30 a.m. on Tuesday, May 5, 2015, the Bureau of Economic Analysis (BEA) released the U.S. trade balance for March of this year. It announced that the goods and services deficit was at $51.4 billion in March. This is more than a 43% increase from February’s $35.9 billion, and the biggest jump in 18 years. Moreover, the trade deficit is at the highest level since October 2008.

Imports Greater Than Exports

Exports of goods experienced a $1.5-billion increase in March, to $127.1 billion. The major contributors to this increase are capital goods, such as civilian aircraft and electric apparatus. Exports of services rose by $0.2 billion in March to $60.8 billion.

Imports of goods have increased sharply to $197.6 billion in March. That is a $16.4-billion, or more than nine percent, increase. The bulk of this surge in imported goods comes from consumer goods, which is $9.0 billion higher than in February. These include cell phones, textile apparel, furniture, and other household goods. Capital goods also increased by $4.0 billion. The automotive sector saw a $2.7-billion increase in imports.

One explanation for the huge increase in imported goods is the resolution of labor disputes at shipping ports on the West Coast. When work resumed, importing activity flourished in March. Another reason for increased importation of goods is the strong U.S. dollar. When the dollar appreciates, foreign goods become relatively cheap compared to domestic goods, and demand increases as a result.

A change in imports of services saw a slight 1.9% ($0.8 billion) increase to $41.6 billion in March. This is comprised of the transport (+$0.6 billion) and travel (+$0.1 billion) industries.

Put it all together by subtracting imports from exports, and you get the largest trade deficit in more than six years.

What the Huge Trade Deficit Means

First, the huge trade deficit is occurring at the same time as both exports and imports are going up. You’d expect that when ports on the West Coast open up, exports should expand just like the imports, but that is not the case here. This suggests that foreign demand for U.S. goods and services is weak. Weak foreign demand is a result of the slowdown in global economic growth. As a result, U.S. businesses that operate overseas are facing tough economic climates.

Trade balance is also an important component of a country’s gross domestic product (GDP). One way to calculate GDP is to add up private consumption, government spending, investments, and net exports. A negative net export drags down a country’s GDP. During the first quarter, U.S. GDP grew a dismal 0.2%.  If the huge trade deficit persists, future GDP numbers will be even more disappointing.

There is more to trade balance than just the number that enters the GDP. A country with a trade surplus gains the benefit of production. These upsides include more skills and expertise gained through production, higher employment, more research and development, and economies of scale. Failing to be a net producer in the global economy, the U.S. is reducing a lot of these benefits.

Last but not least, a country with a large trade deficit is virtually borrowing from the world. If the U.S. trade imbalance continues, it will essentially go deeper into debt.