2000 Trade Deficit Sets New Record

February 21, 2001

February 21, 2001 (Trade Byte)

Trade Byte

2000 Trade Deficit Sets New Record

February 21, 2001

The U.S. trade deficit reached a record high in 2000, at 3.7 percent of GDP, or $369.7 billion. This far exceeds the previous record of 3.0 percent of GDP hit in 1987. The figure for the year actually understates the size of the current deficit, since it had been rising rapidly over the course of the year. In the last quarter of 2000, the deficit was running at a $399 billion annual rate, which is equal to 4.0 percent of GDP.

The large trade deficit has two major consequences. In the short-term, it leads to a loss of jobs in manufacturing industries. The United States built up its large trade deficit over the last four years. During this period it has lost more than 300,000 manufacturing jobs. Over the same period, the economy has created more than12 million jobs outside of manufacturing. Since manufacturing jobs are relatively well-paying ones for the 70 percent of the workforce without a college education, the loss of these jobs tends to depress the wages of less educated workers.

The other major consequence of the trade deficit is the accumulation of foreign debt. The U.S. now has a net foreign debt of close to $2 trillion. As a result of its continuing deficit and the interest on past debt, it is accumulating foreign debt at a rate of approximately $450 billion annually. In future years, the interest and pidend payments on this debt will be a drain on the living standards of people in the United States. As a first approximation, the impact of the annual trade deficit and foreign debt on future living standards can be viewed as comparable to the impact of a budget deficit and government debt of the same size. In other words, the trade deficit of $369.7 billion in 2000 should be viewed as posing a problem of roughly the same size as budget deficit of $370 billion.

The 2000 deficit is an increase of $115.7 billion over the $254 billion deficit in 1999. While the deficit rose rapidly in 1998 and 1999 primarily because of stagnating U.S. exports, the main reason for the deficit’s rise in 2000 was rapid growth in imports. From the 3rd quarter of 1997 to the third quarter of 1999, U.S. exports rose by a total of just 1.1 percent. By contrast, since the third quarter of 1999, exports have risen at a very respectable 9.6 percent annual rate.

However, import growth has been even more rapid in this period. Imports had grown at a 9.0 percent annual rate from the third quarter of 1997 to the third quarter of 1999. Since the third quarter of 1999, imports have risen at a 14.8 percent annual pace. While part of this increase has been attributable to the sharp rise in oil prices, non-oil imports have still risen at a 13.3 percent annual rate over this period.

It is worth noting that, while import growth has slowed over the last quarter, along with the economy, export growth has slowed as well. Exports actually fell at a 5.2 percent annual rate from the third quarter to the fourth quarter. This suggests that much of recent export growth has been capital goods and materials used to produce items that will imported back into the United States. As a result, the slowdown in the U.S. economy will initially only have a modest effect on the trade deficit.

Imports have risen rapidly over the last year for a wide variety of goods. For example, imports of semi-conductors rose by $13 billion from 1999 to 2000, imports of telecommunications equipment rose by $5.9 billion, and imports of computer accessories rose by $7.3 billion.

By country, the largest increase in the trade deficit occurred with the OPEC countries with a rise of $26.0 billion. The trade deficit with China rose by $15.1 billion to $83.8 billion. The U.S. trade deficit with the European Union rose by $12.2 billion to $55.5 billion. The deficits with Canada and Mexico by $18.3 and $1.3 billion, respectively. The deficit with Canada for 2000 was $50.4 billion, it was $24.2 billion with Mexico.

While the rise in the trade deficit had its origins in the East Asian financial crisis, this cannot explain its size or persistence. The real value of the dollar (measured against the currencies of U.S. trading partners) has risen by approximately 15 percent from its pre-crisis levels. Barring a serious downturn (which will reduce the deficit by lowering imports), the nation will not see a significant reduction in its trade deficit until the dollar falls back towards a more sustainable level.

Dean Baker is co-director of the Center for Economic and Policy Research.

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