Why is our trade balance so important?

Posted on July 6, 2010

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In order for people to prosper, they have to be able to earn money. Whether they work to provide a good or a service, they will have a base of consumers to rely on. If they have a lot of customers, they can work more, charge more, and earn more. This is all very basic, something everyone understands on a small scale. But modern business, in this area of globalization and the Internet is very complicated, and many people have no idea who the ultimate consumers of the products they create are. The international nature of these customers might be a surprise.

America exports all manner of things, from cars to industrial supplies to art and entertainment, (the last two are particularly popular and profitable) at a total value of $148.81 billion in April. But we import far more, $189.09 billion in April. Every time you buy a shirt made in China, French wine, or gasoline, you are the end of a chain of buyers that at one point bought a product from a Chinese or French or Saudi Arabian (or Venezuelan, or Norwegian) company. This sounds all very normal and boring, and one of the miracles of our time is that it is.

The problem comes with the aggregate effects. Essentially, when we import more than we export, we as a country are buying more than we are making. Domestic trade is zero-sum. Someone makes something, sells it and earns money, and someone buys it and spends the same amount of money. The buyer is poorer, but the seller is richer. When we import more than we export though, we are sending money overseas. We pay for these purchases in dollars, and the sellers then have to sell those dollars for their own currency, to buy things for themselves, or lend those dollars, earning interest.

Someone has to buy or borrow those dollars, and since we have fewer exports than imports, (our exporters would be paid in foreign currencies and would want to buy dollars with that money) the rest of the world ends up loaning America back the dollars it spends. The government borrowed some, and American consumers and businesses borrowed the rest. This worked for a short time but was unsustainable. American people and banks finally realized they were more in debt than they could handle, which in part caused the recent crisis.

We are still buying more than we are making. In the short term, the slack is being taken up by the huge deficit the government is running. Long term, nothing has been solved, and another crisis is in the making. Some politicians blame China, which uses its exchange rate to make its goods cheaper. This may be a part of the problem, but the largest single import the US buys is oil. Like so many other problems, this one would be nearly solved if we could reduce our use of petroleum.

1 http://www.onelook.com

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