According to economic theory, countries should export goods in which they have a comparative advantage in production and import those in which they don’t. For several years, the U.S. has been the number 1 importer and the number 2 exporter in the world. But the U.S. has recently imposed tariffs on imports from several foreign nations, citing the growing U.S. trade deficit as a main reason. So let’s use FRED to examine the overall picture of the U.S. trade deficit and the trade balance with its largest trading partners.
The first graph shows net U.S. exports, defined as the difference between total exports and total imports, divided by GDP. This net exports-to-GDP ratio has been negative since the late 1970s, when the U.S. started running a continual trade deficit. One explanation involves important sources of income the U.S. receives from abroad, as explained in a past FRED Blog post. This flow of foreign income allows the U.S. economy to consume more than it produces.
Exploring this and other theories in detail is beyond the scope of this post, but this persistent trade deficit over the past 40 or so years does lead to interesting questions involving the U.S.’s trading partners. For instance, is the trade deficit driven mostly by trade with one particular country?
The second graph plots the difference between exports and imports as a share of GDP with respect to the U.S.’s five largest trading partners: China, Canada, Mexico, Japan, and Germany. We can see right away that there’s a significant difference between the U.S. trade deficit with China and the U.S. trade deficits with the other countries. It’s also interesting to note that, in the 1990s, the largest share of the trade deficit originated from trade with Japan. But since China’s entry to the WTO in late 2001, the largest share is China’s. We also see that the U.S. had roughly balanced trade with Mexico in the early 1990s; but around 1994, coinciding with the implementation of NAFTA, the trade pattern changed and a noticeable deficit with Mexico emerged.
Now, is having persistently large trade deficits a bad thing? The answer to this question is not straightforward. There are several forces affecting the direction of trade with different countries, and a substantial amount of research in economics is dedicated to answering this question.
How these graphs were created: For the first graph, search for and select “Net Exports of Goods and Services, Billions of Dollars.” From the “Edit Graph” panel, add a second series to the graph: “Gross Domestic Product, Billions of Dollars.” In the formula box, type a*100/b. For the second graph, search for and select “U.S. Exports of Goods by F.A.S. Basis to China, Mainland (EXPCH).” From the “Edit Graph” panel, add a second series to the graph: “U.S. Imports of Goods by Customs Basis from Germany.” Then add the “Gross Domestic Product, Billions of Dollars” series again. In the formula box, type (a-b)*100/(c*1000). Then use the “Add Line” feature to repeat the above steps for the other countries (Canada, Mexico, Japan, and Germany).
Suggested by Asha Bharadwaj and Maximiliano Dvorkin.