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Commentary

Candidate name: Sabrina Toscano

School: Windermere Preparatory School

Teacher: Mr Bushong

Title of Publication: Reuters

Title of Article: Wider U.S. trade deficit, weak exports point to slower growth

Source (url): http://www.reuters.com/article/2014/11/04/us-trade-deficit-idUSKBN0IO19X20141104

Date of article: 4th November 2014

Date commentary was written: 22nd November 2014

Section of the syllabus to which the commentary relates: Balance of Payments

Word Count: 750

Wider U.S. trade deficit, weak exports point to slower

growth
BY LUCIA MUTIKANI
WASHINGTON Tue Nov 4, 2014 1:11pm EST
(Reuters) - The U.S. trade deficit unexpectedly widened in September as exports hit a fivemonth low, a sign that slowing global demand could undercut economic growth in the fourth
quarter.
The Commerce Department said on Tuesday the trade gap increased 7.6 percent to $43.03
billion, ending four straight months in which the deficit had narrowed.
"We expect a stronger dollar and weaker growth abroad, most notably in Europe, will take a
greater toll on the trade balance and overall growth in the economy," said Diane Swonk, chief
economist at Mesirow Financial in Chicago.
September's shortfall was bigger than the $38.1 billion gap the government had assumed in is
estimate of third-quarter GDP last week, when it said the economy expanded at a 3.5 percent
annual rate, with trade adding 1.3 percentage points.
Economists, who had expected a $40.00 billion trade gap in September, said the wider deficit
could
cut as much as a half a percentage point off that growth estimate. That would come on top of a
reduction of about two-tenths of a point due to weak construction spending data released on
Monday, they said.
The government will publish revisions to third-quarter GDP later this month.
In another report, the Commerce Department said orders for factory goods fell for a second
straight month in September. Relatively firm domestic demand, however, is expected to keep
U.S. factories humming.
While the trade data had little impact on U.S. financial markets, concerns about weakening
global demand pushed Brent crude oil prices to the lowest level in more than four years,
dragging down U.S. stocks. The dollar fell against a basket of currencies, while prices for U.S.
Treasury debt rose.
STRONG DOLLAR
Exports in September fell 1.5 percent to $195.59 billion, the lowest level since April, a sign that
weakening demand in key markets such as China and the euro zone was starting to weigh.
A survey of U.S. manufacturers published on Monday showed a decline in a gauge of export
order growth, suggesting exports will weaken further.
Apart from slowing global demand, exports are seen crimped by a strong dollar, which so far
this year has strengthened by about 4 percent against the currencies of the country's main
trading partners.

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"We expect that the trade sector actually will subtract slightly from growth in the coming year,"
said Peter D'Antonio an economist at Citigroup in New York.
The decline in exports in September was broad-based, with the exception of food and beverages,
which rose.
Exports to the European Union fell 6.5 percent, while those to China slipped 3.2 percent.
Exports to Japan tumbled 14.7 percent. There were also declines in exports to Mexico and
Brazil.
Overall imports were unchanged in September as petroleum imports hit their lowest level since
November 2009.
A domestic energy boom has enabled the United States to reduce its dependence on foreign oil,
tempering the trade deficit. Declining prices, which hit a seven-month low in September, are
also helping to curb the import bill.
Consumer goods imports, however, were the highest on record in September, as were nonpetroleum imports. Cellphones, most likely Apple's (AAPL.O) new iPhone 6 model introduced in
September, accounted for the bulk of the consumer goods imports.

Wider U.S. trade deficit, weak exports point to slower growth

Exports fell 1.5 percent to $195.59 billion, due to a decrease in exports in China and in
the euro zone, creating a trade deficit, which means that there is more imports than exports of
goods and services in the country. A trade deficit leads to a current account deficit. A current
account measures the flows of funds between one country and the rest of the world for purchased
goods and services. A current account deficit indicates that there is more money leaving the
country than entering. The United States authorities should act to reduce the current account
deficit, by trying to reduce the trade deficit. The current account deficit will decrease aggregate
demand, increase unemployment and inflation rate and depreciate the value of the US dollar. In
the diagram below, there is an increase in supply for US dollar due to import purchases. An
increase in supply decreases the price of US dollar on the exchange rate market. This will make
the price of US goods and services cheaper on the domestic and international market. Foreign
and American consumers will start to buy more American goods after this decrease in price.
There will be an increase in profit for the domestic producers which will increase exports making
the trade balance tend to zero, as well as decrease cyclical unemployment rate. Cyclical
unemployment happens when the total demand for labor forces decreases occurs during a
recession.

Exchange rate diagram

However, it is most likely for a government intervention to fix the current account deficit.
The authorities of the United States may want to use supply-side policies, a combination of
government-led and free market policies assigned to increase the productive capacity of the
country. These policies try to develop a better institutional workplace for production to occur.
There are two types of supply-side policies: market based and government based. A government
based supply-side policy will give capital goods and services where the market failed to do so. A
market based supply side- policy will improve competitiveness and incentives and open labour
markets. The use of a supply-side policy will shift the long-run aggregate supply to the right,
increasing the overall productive capacity of the economy and the full-employment income from
YFE to YFE1.

Supply-side policy diagram

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However, the use of supply-side policies will take a lot of time. The authorities of the
United States may want to use protectionism, a method to limit free trade by using tariffs,
quotas, subsidies and other restrictions. All form of protectionism have a similar effect,
nonetheless, the American authorities should use tariffs. A tariff is a tax that must be paid on a
certain class of exports or imports. Here the tariff would be used on imports. The tariff will
increase the price of foreign goods, making them much more expensive than domestic goods. In
the diagram below, there is an increase in the price of supply world. It increases and becomes
more expensive than the domestic goods. This increase the quantity of goods, made by domestic
producers, which shifted from 0 - Q1 to 0 - Q3. There is a decrease in the quantity of foreign
goods which shifted from Qe - Q2 to Qe - Q4. On the graph, c+f represent welfare loss and d+e
represent tariff revenue. Consumers will start to buy more domestic goods due to their cheaper
price. There will be more exports than imports, reducing the trade balance to zero and decreasing
the current account deficit. Furthermore, the increase in demand of goods from domestic
producers will need to hire more people in order to meet this demand. There will be then a
decrease in unemployment. Moreover, the increase in demand of goods from domestic producers
will increase their profit, making these firms very attractive to invest in. The financial account,
which measure the investment of one country with the rest of the world, will be in surplus. The
financial account surplus should cancel out when added to the current account deficit, thus the
overall balance of payment will tend toward zero. Nonetheless, with the use of protectionism will
increase the price of goods in the United States due to the fewer choices and resources
advantages. There will, as well, be a decrease in access to new markets. In my opinion, the use of
protectionism, such as tariffs, will be the best solution for the United States current account
deficit.
Tariff diagram