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Who’s Afraid of the Big, Bad Trade Deficit? Some Questions and Answers

February 17, 1995

NEW YORK (AP) _ 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 the trade deficit isn’t a serious problem. Some say it’s not a problem at all. Some even say it’s a sign of America’s economic might.

Questions and answers:

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

A: The United States buys overseas more 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.

American manufacturers also gain when they purchase foreign-made equipment that makes them more productive and efficient. Germany is a leading supplier of such goods.

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 so 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 declined as the quality of their goods stagnated or fell, costs rose and foreign competition intensified. Some American businesses saw their market-share stolen by overseas rivals. But the United States now leads in productivity and offers a range of world-beating goods, despite a growing deficit.

Q: Is the deficit going to keep growing?

A: Economic recoveries are under way in the European Union and Japan, two of our biggest trade partners, and U.S. growth is slowing. That helped reduce the deficit toward the end of last year and likely will cut it further in 1995.

Q: Why do people get upset about the deficit?

A: It’s partly a matter of national pride. Running a deficit means that you’re a debtor, and that’s hard for many people to swallow. But there are also some hard economic issues. Imports have ruined some U.S. industries, such as textiles, toys and electronics, and caused significant job losses.

In addition, our deficits with some countries are due at least partly to policies and practices that inhibit or harm imports. The U.S. auto industry has complained for years about trade barriers in Japan. America is on the verge of a trade war with China over piracy of U.S. patents and products.

Some economists warn that deficits with some Asian nations won’t narrow because they are ``structural,″ meaning they don’t reflect relative economic strength, and have called for tough U.S. action to force open foreign markets.

Q: So there’s really nothing to worry about?

A: Not exactly. Like a household that overspends, a country that runs a deficit has to borrow money or sell assets to pay bills. America finances its shortfall by selling stocks, bonds, land and other assets to foreigners. As long as overseas investors remain confident in the U.S. economy and financial markets, there’s little to worry about. But countries that rely on foreign investment to finance their debts are vulnerable if confidence erodes _ that’s partly why Mexico is in a financial crisis now.

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