Guest Contributor William Krist: Another Huge U.S. Trade Deficit – Should We Be Concerned?

Though slightly down relative to the previous month, the U.S. has once again run up a huge merchandise trade deficit, some $56.9 billion for the month of September, according to Commerce Department data released today.  Our deficits, and the huge trade surpluses run up by some countries, such as China, Germany and Japan, are a threat to the stability of the global trade system.  Our trade deficit is largely funded by foreign purchases of U.S. financial assets, but at some point in the not-too-distant future, according to most economists, we may reach a crisis point where foreign lenders will be reluctant to continue funding our deficit.  At that point interest rates in the U.S. will rise, perhaps precipitously, and the value of the dollar will fall sharply.

Our large trade deficit has two causes.  First, China and some other nations have pegged their currency to the dollar, which prevents the normal exchange system from balancing out as would be expected without government intervention.  Second however, U.S. policies bear a great deal of the blame.  These include our low national savings rate and lack of an energy policy to address our excessive dependence on imported oil.

At its recent meeting, Finance Ministers of the Group of 20 leading nations acknowledged concerns with global trade imbalances, and China has taken a very small step to raise the value of its currency.  However, far more action is needed both internationally and domestically, including a better international consensus on exchange rates and U.S. actions to address our massive government deficit, promote private savings and reduce our dependence on imported oil.  We will know this weekend if the heads of state of the G-20 countries are able to arrive at a better international consensus on exchange rates.

William K Krist is a Senior Policy Scholar at the Woodrow Wilson Center.  He is a former Senior Vice President of the American Electronics Association.  He has written extensively on trade, development, and the environment. For more information on this topic read his paper ‘The Looming U.S. Trade Crisis.’  Jonathan Bennett is a Research Assistant at the Woodrow Wilson Center.

Sources: U.S. Census Bureau, U.S. Treasury Department

Photo credit: G20 family photo courtesy of flickr user Downing Street.

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