Q & A : What Is a Trade Deficit and Why Do We Have One? For Starters, It's Not Necessarily a Bad Thing

From Associated Press

The record U.S. trade deficit reported by the Commerce Department throws a spotlight on a problem that has dogged the economy since the early 1980s.

Persistent red ink in U.S. trade with the rest of the world has spurred fears of declining economic competitiveness and the loss of jobs to other countries. But a number of economists contend that the trade deficit isn't a serious problem. Some even say it's a sign of America's economic might.

Here are some answers to common questions:

Q: What is a trade deficit and why do we have one?

A: The United States buys more goods overseas than it sells to other countries.

Q: Is that bad?

A: Not necessarily. Americans benefit from the availability of goods that have become too costly to produce in the United States. We buy bananas from Latin America, clothes from China, and consumer electronics such as cassette players and televisions from Taiwan and South Korea. Because their labor and other costs are lower, foreign countries can provide many items at prices U.S. consumers can afford. U.S. manufacturers also gain when they purchase foreign-made equipment that makes them more productive and efficient.

Q: Why is the deficit so big?

A: It's true that $166.29 billion sounds frightening, but in comparison to the size of the economy, it's not terribly big. The value of all goods and services produced in the United States annually exceeds $6 trillion.

Q: Why is America selling less than it buys?

A: The deficit has expanded in recent years largely because the U.S. economy has been growing at a healthy pace and U.S. companies and consumers could afford to buy more imports, while recessions elsewhere dampened demand for America's exports.

Q: Does the deficit reflect declining U.S. competitiveness?

A: That may have been the case years ago. In the 1970s and '80s, many U.S. industries declinedas the quality of their goods stagnated or fell, costs rose and foreign competition intensified. But the United States now leads in productivity and offers a range of world-beating goods.

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