Changing Causes of the U.S. Trade Deficit

Publication Date: April 2005

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Economics

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Abstract:

The nation's trade deficit is equal to the imbalance between national investment and national saving. National saving is the sum of household saving, business saving, and public sector saving (a budget deficit equals public sector borrowing). In the 1990s, this imbalance was largely due to a private investment boom and decline in private saving. In the 2000s, private investment fell and private saving rose. All else equal, this should have led to a smaller trade deficit. However, all else was not equal during this period -- the public sector budget moved from a surplus of 2.4% of GDP in 2000 to a deficit of 3.1% in 2004. Thus, while the borrowing needs of the U.S. private sector declined, the public sector borrowing needs increased, and a stable U.S. national savinginvestment gap continued to be filled by foreign lending as a result. The composition of capital inflows has also changed from the 1990s. While capital inflows were from mostly private sources through 2001, since then they have come increasingly from official sources. This is largely the result of a few Asian countries purchasing U.S. assets to moderate or prevent their currencies from appreciating against the dollar. If official capital inflows declined sharply, the dollar and trade deficit would likely decline, U.S. interest rates would rise, and U.S. spending on capital investment and consumer durables would fall, all else equal. This report will be updated as events warrant.