The U.S. international trade deficit in goods and services increased by $3.3 billion to $31.5 billion in February from a revised $28.2 billion in January as imports increased by $4.2 billion and exports increased by $1.0 billion.

KEY CONCEPTS

Exchange Rate, Exports, Imports

Current Key Economic Indicators

as of May 5, 2013

Inflation

On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers decreased 0.2 percent in March after increasing 0.7 percent in February. The index for all items less food and energy rose 0.1 percent in March after rising 0.2 percent in February.

Employment and Unemployment

Total nonfarm payroll employment rose by 165,000 in April, and the unemployment rate was little changed at 7.5 percent. Employment increased in professional and business services, food services and drinking places, retail trade, and health care.

Real GDP

Real gross domestic product increased at an annual rate of 2.5 percent in the first quarter of 2013 (that is, from the fourth quarter to the first quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 0.4 percent.

Federal Reserve

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent...


Announcement

The U.S. international trade deficit in goods and services increased by $3.3 billion to $31.5 billion in February from a revised $28.2 billion in January as imports increased by $4.2 billion and exports increased by $1.0 billion.

Goals of the International Trade Case Study

The purpose of the international trade case study is to provide the most recent data on international trade, interpretations of trends and causes of changes in trade deficits and surpluses, and a number of relevant student and classroom activities.

Note to the Teacher

You may wish to use the following larger versions of the graphs and tables from this lesson for overhead projection or handouts in class:

Data Trends

Although the trade deficit decreased during last fall and winter, the February trade deficit has returned to levels that are about equal to those of last spring and summer. The latest increase is due to rising imports as our economy begins to recover from the recession and as oil prices increase. The increase in exports was not sufficient to offset the increase in imports.

Of interest in the current trade announcements are the effects of the Winter Olympics on both imports and exports. Seldom does a single event affect the international data in this fashion. The U.S. exported services to individuals and organizations involved in the Olympics and imported services via royalty payments to the International Olympic Committee. See the discussion of specific changes in imports and exports below.

The trade deficit (exports minus imports) increased rapidly from March 1998 to September of 2000. From September 2000 to March 2001, the monthly trade deficit remained relatively stable around $33 billion. Between March and September, imports fell more rapidly than exports, causing the trade deficit to decrease from $33 billion to $28.4 billion.

Following the events of September 11, both imports and exports of goods and services decreased tremendously. Imports fell by more than exports and the trade deficit narrowed rather dramatically to $18.9 billion in September, the lowest level since March 1999. The largest change was a decrease in imports of services due to decreases in travel and a special treatment of insurance payments resulting from the September 11 tragedy. The insurance claims received returned to normal levels during October, which caused the measured service imports to increase by $10.6 billion and the trade deficit to increase to $29.6 billion.

Figure 1: Monthly Balance of Trade in Goods and Services

In October and November, the level of exports and imports more closely approximated that of last summer and the trade deficit returned to the $28 billion to $31 billion range. In December, a large decrease in imported goods combined with an increase in services exported, caused the trade deficit to decrease to $24.7 billion. In January and February 2002, the amount of goods imported increased causing the trade deficit to return to $28 to $31 billion range. (For more information on the impact of September 11 tragedy on international trade, see the September and October case studies).

Exports and imports in dollar terms have been increasing for the last 30 years. Exports and imports as percentages of GDP have been increasing throughout most of those years. As percentages of GDP, exports and imports rose rapidly in the 1970s, were steady in the 1980s, and began to rise again in the 1990s. The trade deficit, as a percentage of GDP, increased dramatically in the 1980s, shrank in the late 1980s and early 1990s, then began to rise again in the late 1990s. Over the last several years, imports have continued to rise as a percentage of GDP and exports have fallen.

Figure 2: Exports and Imports of Goods and Services (Annual GDP 1970-2000)

Figure 3: Exports and Imports of Goods and Services as a Percentage of GDP (1970 - 2000)

Components of International Trade

The United States imports and exports both goods and services.

Figure 4: A breakdown of Exports and Imports by Goods and Services

As shown in the graph above, currently goods account for 70 percent of our exports and 83 percent our imports.

Services account for 30 percent of our exports and 17 percent of our imports. (The spike in the graph in the percentage of imports that is made up of goods and the fall in the percentage that is services is due to the rather larger absolute decrease in imports of services during September.)

The major categories of goods imported and exported are:

  • Capital goods (aircraft, semiconductors, computer accessories, machinery, engines)
  • Vehicle parts and engines
  • Industrial materials and supplies (metals, energy, plastics, textiles, lumber)
  • Consumer goods (pharmaceuticals, apparel, toys, TV/VCRs, furniture, gem stones)
  • Food, feed, and beverages.

The relative contributions of each to U.S. exports and imports for the year 2001 are illustrated in the two pie charts below.

Figure 5A: Components of Exported Goods and Services (2000 Annual Data)

Figure 5B: Componenets of Imported Goods and Service (2000 Annual Data)

In 2001, the United States exported more capital goods (for example, semiconductors, computer accessories, and electrical equipment and machines) than we imported. Food, feed, and beverages exported and imported were approximately equal. But in automotive products, consumer goods, and industrial supplies (crude oil, chemicals, newsprint, plastics, and others), we imported significantly more than we exported.

Automobiles (7%), semiconductors (5%), computers and accessories (5%), aircraft (5%) and telecommunications equipment (3%) are the largest components of U.S. exports. Among imports, automobiles (14%), crude oil (6%), computer accessories (6%), and apparel (4%) are the most significant goods categories.

  • · Travel: Goods and services purchased by international visitors to the United States and U.S. citizens who are traveling abroad (food, lodging, recreation, gifts). (25% of exports, 29% of imports)
  • Passenger fares: The transportation expenditures of people from the United States traveling abroad and individuals from other countries traveling to the United States (primarily airfare). (6% of exports, 11% of imports)
  • Transportation: The transportation costs for goods moved by ocean, air, pipeline, and railway to and from the United States (5% of exports, 7% of imports)
  • Royalties and license fees: Fees for patents, copyrights, and trademarks. (14% of exports, 8% of imports)
  • Other: Government, defense and private services.

Changes in Imports and Exports of Goods and Services

Table 1
Changes in Imports and Exports of Goods and Services
Changes in Exports for February (in Billions)
Category   Change   Total

Exports   $0.1   $79.2

  Goods

  $0.1   $55.1

    Capital Goods

  -$0.2    
    Automotive...   $0.2    
    Consumer Goods   $0.0    
    Industrial Supplies   $0.1    
    Food, Feed, Bev.   $0.1    
    Other goods...   $0.2    
Services   $0.9   $24.1
Changes in Imports for February (in Billions)
Category   Change   Total

Imports   $4.2   $110.7
  Goods   $3.3   $92.1
    Capital Goods   $0.5    
    Automotive...   $1.6    
    Consumer Goods   $1.1    
    Industrial Supplies   $0.1    
    Food, Feed, Bev.   $0.2    
    Other goods...   -$0.1    
Services   $0.9  

$18.6

The slight increase in exports in February was mainly due to an increase in services exported. The U.S. exported more industrial supplies and materials, automotive vehicles, parts and engines and food, feed and beverages and other goods, but this was offset by fewer exports of capital goods. The increase in services exported was due to increases in travel and passenger fares and other private services (including business, professional and technical services, insurance and financial services), which also included funding from the International Olympic Committee for the 2002 Winter Olympics. Travel and passenger fares are continuing to recover from their post-September 11 lows recorded in October.

The increase in imports during December was due to a large increase in goods imported combined with an increase in imported services. The increase in goods imported was primarily due to increased imports of automotive vehicles, parts and engines, consumer goods, capital goods, foods, feeds and beverages, and industrial materials and supplies. This increase was partially offset by lower imports of other goods. Services imported increased largely due to an increase in royalties and license fees which included payments to the International Olympics Committee for broadcasting rights to the 2002 Winter Olympic Games. Travel and passenger fare imports also continued to increase. (For more information on the impact of September 11 tragedy on international trade, see the September and October case studies).

International Trading Partners

Figure 6: The Major Trading Partners of the U.S. in Goods for 2000

The graph above shows what percentages of United States imported goods come from each of our major trading partners and the percentage of our exported goods going to those same countries. These are percentages of United States exports and imports and do not necessarily represent a trade surplus or deficit with individual countries.

As you can see in the graph, 25% of goods exported from the U.S. are sent to Canada, while 20% of all U.S. goods imported come from Canada. Since our exports to Canada exceed our imports, the U.S. has a trade surplus in goods with Canada. The U.S. also has a trade surplus in goods with Mexico, Britain, and the Netherlands.

More frequently, the U.S. runs a trade deficit - that is we are importing more goods from abroad than we are exporting. Trade with Japan accounts for 13% of U.S. imports and 9% of U.S. exports. As shown above, we are also running a trade deficit with China, Taiwan, and Germany.

The Effects of Price Levels and Changes in Real GDP on Exports and Imports

Exports and imports are influenced by a variety of factors. Increases in income in the United States will increase the demand for all goods and services, including those that are imported. Thus, imports will rise as incomes increase. Increases in income in other countries have a positive effect on our exports. Decreases in income here cause exports to fall. Decreases in income among our trading partners cause our exports to fall.

Changes in prices here and abroad are also important. If we experience more inflation here than the rest of the world is experiencing, our goods cost more and thus our imports will rise and exports will fall. The reverse is true if the rest of the world experiences a greater rate of inflation than we do in the United States.

Changes in tastes will also affect import and export levels. If U.S. residents consume more fruit and vegetables, imports will increase. As the rest of the world finds U.S. software and airplanes more attractive, our exports will rise.

Changes in exchange rates influence exports and imports. Exchange rates are the prices at which currencies are exchanged. For example, one U.S. dollar can buy (or be exchanged for) approximately 10 Mexican pesos in international currency markets. Or, one Mexican peso costs about 10 cents. Most exchange rates are determined in open markets, and the rates depend upon the supply and demand for each currency.

If the international value (price) of the dollar increases (say from 10 pesos per dollar to 12 pesos per dollar), U.S. goods become more expensive for Mexicans and goods from Mexico become cheaper for people in the United States. Before the increase in the international value of the dollar, automobiles costing $20,000 in the United States cost an individual in Mexico 200,000 pesos ($20,000 times 10 pesos per dollar). After the change in the value of the dollar, the same car will cost will cost someone in Mexico 240,000 pesos ($20,000 times 12 pesos per dollar). Thus, Mexicans will purchase fewer U.S. cars.

At the same time, Mexican goods become less expensive for people in the United States. For example, a Mexican vacation stay that costs 40,000 pesos formerly cost someone from the United States $ 4,000 (40,000 pesos times $.10 per peso). Now, the vacation is cheaper for the United States as the cost of a peso falls from $ .10 to $ .083 (40,000 pesos times $ .083 per peso = $ 3,320).

The Cause of Trade Deficits

One of the more difficult macroeconomic concepts is the determination of trade deficits or surpluses. If exchange rates fluctuate with the international supply and demand for a currency and if there are free flows of capital and goods, the relation of saving and investment in an economy determines the balance of trade in economies. For example, if saving (of all forms - personal, corporate, and government) is less than the amount of investment spending in an economy, there will tend to be upward pressure on interest rates (actually real interest rates). Those increases will tend to increase the international demand for the domestic currency. That increased demand will cause the international value of the currency to increase. In turn, the rise in the international value of the currency will make the country's exports more expensive for those abroad and thus exports will decrease. The country's imports will be less expensive and thus imports will increase. The result of the increase in imports and fall in exports will be a rising trade deficit (or a falling trade surplus).

In the current context of falling trade deficits, the explanation is exactly the opposite. The danger in asserting that opposite cause with a great deal of confidence is that the decreases in the deficit may be only temporary changes and not reflective of changes in the trend.

Interest in Tariffs and Quotas

The U.S. has recently established tariffs on steel and lumber imports and Canada and the European Union have threatened to place tariffs on goods exported from the U.S. Concern with rising unemployment during recessions and rising trade deficits often encourage governments to consider protecting domestic industries. Other countries often respond with tariffs of their own on other goods. The establishment of tariffs is unlikely to reduce trade deficits and unlikely to have long-run positive effects on unemployment. The current news attention to tariffs does offer an opportunity for classroom discussion of the benefits and costs of the policies.

Questions for Students

  1. What does it mean if a country has a balance of trade that is zero?

    [It means that imports exactly equal exports.]

  2. What does it mean if a country has a balance of trade that is in deficit?

    [It is importing more goods and services than it is exporting. It is described as a "deficit" because the U.S. is sending more dollars abroad than it is getting in return.]

  3. How can a country receive more goods and services from abroad than it sends in return?

    [If the U.S. imports more than it exports, the rest of the world will end up with more dollars. (The U.S. will have paid out more dollars for its imports, than it received back for its exports.) If institutions and individuals in other countries want to use those dollars to make investments in the U.S., the value of the dollar will not change. If those dollars are not desired, there will be a surplus of dollars on the international market and the value of the dollar will fall. That will result in a reduction in imports and an increase in exports.]

  4. The following is a quote from the December 18, 2001 Wall Street Journal.
    "In October, the U.S. deficit with China shot up to $9.15 billion, a 7.6% increase over September, and the biggest one-month shortfall for any country on record. After 14 years of lobbying, China gained entrance into the World Trade Organization this fall. The Bush administration is hoping that the membership will boost U.S. export sales and help lower the deficit. The U.S. deficit with the 15-nation European Union rose by 16.1% in October to $6.96 billion, but the imbalance with Canada -- the U.S.'s largest trading partner -- fell 11% to $3.79 billion. The deficit with Mexico declined 13% to $2.59 billion. The U.S. deficit with Japan, which in the past had been the greatest imbalance, was up by 30% to $6.96 billion."
    Should we be concerned with large trade deficits with individual countries?

    [Trade deficits with individual countries are to be expected, just as individuals buy more from some stores (the grocery store, for example) than they sell to those stores, thus incurring a deficit with the store. Individuals sell services to their employers and normally buy relatively little from their employers. Thus they have surpluses with those companies. What matters is the overall deficit or surplus.]

  5. If the growth in spending in U.S. economy is slowing, what will be the likely effect on imports? Explain why. If the growth in spending is more rapid in the U.S. than the rest of the world, what will be the likely effect on net exports? Explain why.

    [If growth in U.S. spending is slowing, spending on imports will not grow more slowly. In addition, if that slowing growth in U.S. spending is causing less inflationary pressure, U.S. goods may become relatively cheaper and more people will buy domestic goods and fewer imported goods. If growth in the United States is accelerating, the opposite result will be true.]

  6. If inflation is higher in the United States than in countries with which the United States trades, what will likely happen to U.S. exports? Why?

    [Higher prices in the United States means that people abroad will substitute other, now less expensive goods, for some U.S. goods. Thus, U.S. exports will decrease.]

  7. Why would a country want to place tariffs and quotas on imported goods?

    [Tariffs are taxes placed on imported goods. Quotas are restrictions on the quantities of specific types of goods that can be imported. In both cases, the goal is usually to restrict imports and thereby protect a domestic industry from competition. While an industry and its employees and owners may benefit, the entire economy is likely to be worse off as a result. Less competition and less trade means that consumer well-being will be reduced.]