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    A Widening Trade Deficit: Something to Worry About?

    06/15/2009

    Last Wednesday, the Department of Commerce announced that the US trade deficit has grown for the second consecutive month. In April alone, the US imported $29.2 billion worth of goods and services more than it exported. When similar news came out in June of 2008, then-Senator Obama said the trade deficit was the result of “unprecedented fiscal irresponsibility.”

    So is a balance of trade essential for a country’s citizens to be financially successful? Not necessarily.

    According to economists, individuals only trade when each partner finds the trade mutually rewarding. Trade is based on comparative advantage, meaning that the money changing hands is not always equal. This discrepancy on a national scale is the difference between imports and exports: the trade deficit. And yet, this discrepancy is not a problem since the money ends up coming back to the country it left, and balancing out.

    For example, look at America’s second-largest trading partner. In 2008, the US imported more than $300 billion worth of goods and services from China, but only exported approximately $70 billion worth. That sounds like a lot of money moving from the US to China. However, some of those out-going billions are actually making their way back home.

    According to research done by Foreign Policy, only 45% of Chinese exports to the US are completely produced within China. That means the other 55% is coming from around the globe, including the US. This is due to the fact that China imports most of its intermediate goods and exports mainly finished goods.

    So despite a growing trade deficit, individuals will keep trading whenever there exists a mutual benefit. And when people are allowed to trade freely, without having to keep up a balance between incoming and outgoing dollars, they will always do so when it is mutually advantageous. And there’s nothing worrisome about a win-win situation.