Pennsylvania Investment Observer

Consequences of Our Trade Deficit

by Daniel J. Nestlerode

The United States has been running a trade deficit for almost thirty years. In recent years, the trade deficit has become quite large in relation to our economy. The consequences that are normally ascribed to large trade deficits (falling relative currency values, rising interest rates, local inflation) have not seemed to apply to the United States. Yet, our large trade deficits do have consequences that are felt right down to the level of your local convenience store.

It is easy to understand that as we buy more goods and services from abroad than we sell abroad, that we will have a balance for trade that requires us to send dollars overseas. The other side of this transaction is investment, by foreign companies and governments in the securities of the United States—treasury offerings, stocks and the like. This is what I call the repatriotization of our trade deficit. Indeed, some foreign companies are buying U.S. companies and setting up shop here in the states to serve our consumer markets with their stash of dollars. Still, all the ramifications of our trade deficit are not easily understood.

Yet one ramification is becoming very clear to everyone who fills up their vehicle at their local gas pump. The price for international fuels, crude oil and the like, are determined by international supply and demand. We have provided the Chinese economy with a huge surplus of dollars from our trade deficit with them and they are in turn buying large amounts of crude oil on the international markets. The resultant shortage of crude oil has resulted in substantially higher prices for oil internationally, raising the price of gasoline at the local pump. The Chinese demand for oil is fueled by their excess dollars, the result of our trade deficit with them. They, in turn, buy more and more oil resources and increase the international price for fuels, causing our consumers to pay higher and higher prices for diesel, heating oil and gasoline. In this fashion, our trade deficit shows up in the United States. Yes we got a great deal on the televisions, computers, toys, clothes and DVD players. On the other hand, we are paying more for fuels.

The result of our trade deficit is not all bad. Foreign buying of our bonds keep our interest rates relatively low. We also get a lot of electronic products at rock bottom prices, keeping our inflation rates relatively low for these goods. And many foreign companies invest in the United States, buying our stocks, real estate and building plants to produce goods here, employing our citizens. Yet the excess dollars they have increases the cost of international commodities, raising prices we pay to fuels and metals.

We are part of the world economy, no longer self sufficient in many goods and services. We have to consider the consequences of how we run our economy, both as consumers and investors. It just doesn't seem to get any easier does it?

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