Recently, many countries around the world have been experiencing trade deficits. The United States is not an exception as it can be noted from the U.S. Commerce Department. According to an article, Import Surge Widens U.S. Trade Gap, published in Financial Times on 11 January 2013, the United States’ trade deficit increased by 16%, a one-month increase. From the findings of the survey, many economic explanations can be used to explain the causes of the trade deficit. This paper tries to relate the article to the principles of international trade, which are the major cause of trade deficit.
According to the article, “a wider trade deficit acts as a drag on growth and is usually the result of the U.S. earning less on overseas sales of American -made goods while spending more on foreign products.” In the United States, the need of financial resources is higher than the available funds. Therefore, the elaboration of budgets at any level is one of the major concerns in the application of principles of budgetary balance.
The approaches of sizing budgets deficits, which means financing and sizing public debt in the United States, needs to be looked at carefully. This is because the actual financial, economic, social, and administrative conditions could lead to various problems that may impose an extremely adverse negative impact caused by sizing of budget deficits and public debt. From the article,Ian Shepherdson, chief economist at Pantheon Macroeconomics, notes that only “a small dip in the deficit” was expected and therefore the increase in trade deficit “is a big surprise, and very disappointing.”
The report by the U.S. Commerce Department leaves us with more questions than answers.
What are the causes of the huge budget deficits? First of all, it is better to understand how and when budget deficit occurs. A budget deficit occurs when government spends more than what it can earn as revenue. Budget deficit has various negative implications. For instance, when a government runs into continuous deficit in each financial year, the deficit will accumulate into a national debt over time.
The U.S. fiscal policy has been seen as one of the contributors to the increased budget deficit. The fiscal policies are sometimes flawed. In addition, piling up of the health and retirement costs has a great contribution to the budget deficit. However, according to the article, the deficit may have been caused by the rise in consumer imports. High quality global journalism requires investment. Mr. Carnell noted that, “the rise in consumer imports may have led to an unwarranted inventory build-up which might in turn weigh on US growth in the first quarter of 2013….” The super storm Sandy, a natural phenomenon that occurred on the northeast coat in October, may have also contributed to the budget deficit according to the article.
In relation to international trade, budget deficit may lead to an increase in interest rates and thus reduce investments in the country. Budget deficit also reduces the funds to be given as loans to investors, which in turn leads to high interest rates and consequently to a fall in net foreign investment. Investing to other countries will be largely affected.
If the U.S. government does not implement various policies to reduce the budget deficit, it will continue to skyrocket and may be worse over the next few years. Budget deficit has contributed to the poor performance of the U.S. economy. The income of Americans has already been affected in one way or another through taxation. Worse still, the budget deficit may trigger financial crisis, which could take time to sustain. This would have adverse negative effect on the U.S. economy.