What should America do to address it's trade deficit?
With the US still recovering from the financial crisis, accruing an ever more rapidly increasing federal budget deficit, and still far from eliminating the markets severe toxic debt problems, I see the trade deficit as yet another potential catastrophe waiting to happen if foreign investor confidence in American enterprises get’s further undermined as rocketing foreign investment in increasingly open emerging economies takes up a larger piece of the pie. I’m Canadian, and so I’m biased towards seeing a sustained trade deficit as on par with a sustained budget deficit as a very bad thing for the long-term sustainability of a national economy, and so I’m wondering if anybody is aware of more aggressive moves that may currently be in discussion to address it? If not, then what is your opinion on how to go about doing so, and whether or not it’s even really a big deal? If we’re imagining pie in the sky solutions, I favour a personal tax shift from income taxes to a general sales tax to discourage domestic consumption while boosting exports amongst other things. Would a currency devaluation be utterly out of the question seeing as it may be a bit too much of a shakeup at this time?
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I agree with Meg about the oil consumption and the taxes US citizens pay. In the UK we are taxed to death on oil and it makes us very careful how we use it. It’s extra revenue for the US government too but it would be very unpopular I’m sure. When I visit the US I am amazed at the cheapness of US petrol. High taxes on oil also encourages the purchase of energy efficient cars. As the US car industry is in dire straits I think going down that route would be a solution.
As for your suggestion about a general sales tax to discourage consumption - well, personally, I think that could (emphasis could) be a disaster. There’s no doubt that US citizens need to get out and spend (so long as it’s not a bender on credit) to keep industries moving. Tax breaks I believe should be carefully targeted to encourage domestic consumption of certain goods- e.g. fuel efficient cars for example! If domestic goods have too high a sales tax then it will only encourage the purchase of imports. Thats’ definitely not what the US economy needs.
Reduce the amount of oil we import, by using less and producing more. Oil account for over half of our trade deficit. Most economist believe we should tax gas like Europe does. this would also provide extra revenue to reduce the budget deficit.. The increasing cost of health care and the goverment share of it is the reason the both state and federal government will find it difficult to control spending.
The Canadian economy is totally different the the US — and is primarily based on exporting to the US. As long as the rest of the world — including Canada — remains eager to invest in the US there is no particular reason to be concerned about a trade deficit. Trying to artificially force a change in balance of trade would have very bad implications.
SDD correct, the current US trade deficit is probably not too large and it actually can be sustained forever. At some point it’s possible for it to grow "too large", but it’s self-correcting — the dollar would lose value until American exports are price-competitive enough to change the trade balance.
Further, your concern about foreign investment in open economies is also self-correcting. A foreign importer (say, BMW, Toyota, or Samsung) build plants in the U.S. so as to produce closer to the target market. Yet that means now the U.S. is making its own product rather than importing it — doesn’t matter that the multinational owner is headquartered in another country. That’s a big part of "foreigners buying US assets".
We saw some of this at work in 2007-2008 as the declining dollar began to shift international trade — for example European auto companies were scrambling to move operations into the US.
Also as suggested above, much of the trade deficit is due to imported oil. If we had no oil imports, seems the trade deficit would be trivial. Well we’re a long ways from that but will be interesting to see what happens over time as we move to the many alternatives to imported oil. Though I should point out that will be bad for you hosers in Canada.
I for one simply don’t waste time fretting about the trade deficit.