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handle is hein.crs/govyak0001 and id is 1 raw text is: The U.S. Trade Deficit: An Overview Updated March 8, 2019 Overview The trade deficit is the numerical difference between a country's exports and imports of goods and services. The United States has experienced annual trade deficits during most of the post-WWII period. Some observers argue that the trade deficit costs U.S. jobs, is unsustainable, or reflects unfair trade practices by foreign competitors. Most economists contend this mischaracterizes the nature of the trade deficit and the role of trade in the economy. In general, most economists conclude the trade deficit stems largely from U.S. macroeconomic policies and an imbalance between saving and investment in the economy. Economists also conclude that trade creates both economic benefits and costs, but that the long-run net effect on the economy as a whole is positive. At the same time, some workers and firms may experience a disproportionate share of short-term adjustment costs. On March 31, 2017, President Trump issued an Executive Order directing key agencies to prepare a written report within 90 days (not yet published) on significant trade deficits with U.S. trading partners, including a focus on: unfair trade practices; and the impact of the trade deficit on U.S. production, employment, wages, and national security. hat is the Trade Deficit? The U.S. merchandise trade deficit is an accounting of the net balance of exports and imports of goods, one component of the overall balance of payments. A broader measure of U.S. global economic engagement, the current account, includes trade in goods, services and some income flows. In 2018, U.S. merchandise exports were $1.67 trillion; imports were $2.56 trillion; and the merchandise trade deficit was $891 billion on a balance of payments basis, with a services surplus of $270 billion. Exports account for about 12% of U.S. GDP; imports account for about 15%. As indicated in Figure 1, the United States annually experiences a deficit in goods trade, but a surplus in services trade. Figure I. U.S. Goods and Services Trade, 1999-2018 Goods Services $trn $trn $2.7 $2.7 Imports $0.9 ~Exports . xot ~1 Imports 1999 2018 1999 2018 Source: Created by CRS with data from Bureau of the Census. By standard convention, each transaction in the balance of payments has a corresponding and offsetting transaction: a surplus or deficit in the merchandise trade account is offset by a transaction in the financial accounts. In these accounts, exports are recorded as a positive amount, because they represent a credit, while imports are recorded as a negative amount, because they represent a debt that must be repaid. What is the Source of the Trade Deficit? Given the composition of the U.S. economy, most economists argue the U.S. trade deficit is the product of U.S. macroeconomic policy. Currently, the demand for capital in the U.S. economy outstrips the amount of gross savings supplied by households, firms, and the government sector (a savings-investment imbalance), which pushes up domestic interest rates. With floating exchange rates and liberalized capital flows, capital inflows bridge the gap between domestic sources of capital and demand, allowing the country to consume more than it produces, represented by the trade deficit. Foreign investors also seek dollar- denominated assets as safe-haven assets during times of economic stress. The dollar, as a de facto global reserve currency, facilitates the trade deficit by broadening the availability of dollars and dollar-denominate assets. Without this unique role, the United States would have faced major challenges sustaining trade deficits without making domestic economic adjustments. Foreign demand for dollars and dollar-denominated assets places upward pressure on the exchange value of the dollar, which raises the cost of U.S. exports and reduces the cost of imports. As a result, the trade deficit is the offsetting amount of the capital inflows. Economists argue that attempting to reduce the trade deficit without addressing the underlying macroeconomic imbalances could affect the economy negatively in various ways, including but not limited to, reducing the annual rate of growth of the economy and the rate of productivity. Furthermore, most economists argue that domestic wage rates, the rate of unemployment, and the overall rate of growth in the economy are the product of the macroeconomic policy environment rather than the product of trade generally or the trade deficit. Trade Agreements and the Trade Deficit Some analysts argue that free trade agreements (FTAs) have contributed to rising trade deficits with some trade partners. The Trump Administration has indicated that its first priority in trade relations is lowering or eliminating bilateral trade deficits. In 2016, the United States ran a merchandise trade deficit of $71.0 billion with its 20 FTA partner countries, but a services surplus of around $80.0 billion, or a combined goods and services surplus of about $9.0 billion. Most economists contend that FTAs are likely to affect the composition of trade among trade partners, but have little impact on the overall size of the trade deficit, given the macroeconomic origins of the trade deficit and https://crsreports.congress.gov

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