The U.S. international trade deficit in goods and services decreased by $2.2 billion to $34.6 billion in July from a revised $36.8 billion in June as exports increased (+$1.1 billion) and imports decreased (-$1.1 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 decreased by $2.2 billion to $34.6 billion in July from a revised $36.8 billion in June as exports increased (+$1.1 billion) and imports decreased (-$1.1 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:

Definitions

Balance of trade data describe the exports of goods and services produced in the U.S. and sold abroad and the imports of goods and services produced abroad and sold to individuals, businesses, and governments in the U.S. To obtain the balance, imports are subtracted from exports and the result is described as a surplus if exports are greater than imports and a deficit if imports are greater than exports.

Data Trends

In July, the overall trade deficit decreased slightly. Goods exported increased, led by automobiles and vehicle parts (+$0.4 billion), while goods imported decreased, led by a decrease in purchases of toys, televisions, and other consumer goods (-$0.6 billion). Services exported increased by a small amount. Services imported decreased by an equally small amount, all of which lead to an overall trade deficit of $34.6 billion.

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.

Figure 1: Monthly Balance of Trade in Goods and Services

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. (For more information on the impact of September 11 tragedy on international trade, see the September and October case studies from 2001.)

In October and November, the levels of exports and imports more closely approximated those of the 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.

During the first quarter of 2002, imports increased as the economy began to recover from the recession and as oil prices increased. Exports have increased in tandem, but have not been sufficient to offset the increase in imports, causing the trade deficit to return to $28 to $31 billion range. As oil prices have continued to increase and the economy continues to recover, the trade deficit has moved higher, reflected in $35 to $36 billion deficits of June and July.

Figure 2: Exports and Imports of Goods and Services (Annual GDP 1970-2001)

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. (See figure 2.) 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 early 1980s, shrank in the late 1980s and early 1990s, then began to rise again in the late 1990s. The last actual annual surplus in the balance of trade was in 1975. Until falling recently, imports have continued to rise as a percentage of GDP and exports have fallen.

Exports were 10.2 percent of GDP for the entire year of 2001; imports were 13.7 percent; and the trade deficit was 3.5 percent of GDP.

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 figure 3, 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 4A: Components of Exported Goods and Services (2001 Annual Data)

Figure 5B: Componenets of Imported Goods and Service (2001 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.

The main categories of services include travel, fares, transportation, and royalties/license fees.

  • 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: Import and Export data for July 2002
CategoryChangeTotal
Changes in Exports for July
(in Billions)
   

Exports   $1.1   $83.2

Goods

  $0.9   $59.1

Capital Goods

  $0.1    
Automotive...   $0.4    
Consumer Goods   $0.1    
Industrial Supplies   -$0.1    
Food, Feed, Bev.   $0.0    
Other goods...   $0.2    
Services   $0.2   $24.1
CategoryChangeTotal
Changes in Imports for July
(in Billions)
   

Exports   -$1.1   $117.8

Goods

  -$0.9   $98.0

Capital Goods

  -$0.3    
Automotive...   $0.0    
Consumer Goods   -$0.6    
Industrial Supplies   $0.1    
Food, Feed, Bev.   $0.1    
Other goods...   -$0.3    
Services   -$0.2  

$19.8

The increase in exports in July was due to increases in both goods and services exported. The U.S. exported more capital goods and automotive vehicles, parts and engines, but this was offset by fewer exports of industrial supplies and materials. The increase in services exported was due to increases in travel and passenger fares, which are continuing to recover from their post-September 11 lows recorded in October

The decrease in imports during July was due to a relatively large decrease in goods imported. The decrease in goods imported was primarily due to decreased imports of consumer goods and capital goods.

International Trading Partners

Figure 5: The Major Trading Partners of the U.S. in Goods for 2001

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 in goods - 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. We are also running a goods trade deficit with China, Western Europe, Canada, Mexico, and the OPEC countries. We are experiencing small goods surpluses with Australia, Hong Kong, and Singapore.

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. 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.]
  5. 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.]