United States Trade Deficit - Term Paper Example

United s Trade Deficit United s Trade Deficit Introduction In the recent years, United s has been faced with an unprecedented amount of borrowing. It has also managed to support its overwhelming account deficit without experiencing significant challenges in foreign investors holding its assets. However, more need to be done in ensuring that the country attracts the same amount of extra foreign savings. This is because the US deficit has plummeted far enough to chew on the resources generated abroad.

In fact, the level of borrowing has overtaken the amount of funding from other countries. The trade deficits has also been linked to the current rapid economic globalization (Higgins & Klitgaard, 2007). As a result, there has been increasing interest from various stakeholders regarding the growing United States current account deficit. These concerns have led to generalized view that the current state of global imbalances is unsustainable. Therefore, change will have to take place in the near future.

The heightened increase in the US current account deficit has increased analyst worries. Some of the analyst argues that this trend is unsustainable. Other views that the world will be faced by a sweeping financial crisis while other predict the prospect of dollar collapsing and hence financial meltdown (Edward, 2005). These issues relating to the performance of the United States economy are a matter of interest to the rest of the world. A reflection on United States trade deficits helps in understanding its impact and sustainability.

The trade deficits affect United States economy on different ways. One of the main factors is that it has led to increase in United States economic growth. This has been due to productivity growth arising from rising investment rates (Mann, 2002). In fact, over half of the increased productivity has been due to the globalization of the economy. This comes from growth in foreign markets, and increased competition in domestic markets from foreign investors. The increased productivity boosts the confidence of foreign investors in regard to gaining more investment in the country.

This also makes united states attractive for both local and foreign investors as a result of increased productivity. On the other hand, the increase of foreign capital flow leads to United States deficit increasing further (Mann, 2002). However, the financial obligations of repaying such deficits have been small in comparison to the economy. The trade deficit is sustainable in the United States economy due to various factors. Firstly, most of the United States borrowings are from local institution.

On the other hand, large amount of the capital flowing in the United States is made up of foreign direct investment and portfolio investment (Mann, 2002). The other benefit the country gets is that most of the transactions are in dollars. This maintains the demands for dollars high and hence demands for high liquid U.S. government security firm (Mann, 2002). These factors make united state capable of sustaining a large external deficit. This is in comparison with other countries that are dominated by foreign currencies.

Moreover, sustainability is achieved to increased global savings and flow. This has caused foreign portfolio to be tilted towards the dollar assets. This exerts downward on the dollar and other U.S assets prices. In fact, there has been increased appetite on foreign acquisition of United States assets (Higgins & Klitgaard, 2007). Moreover, increased investment in the U.S has helped the country to be able to obtain more foreign investment. Moreover, the current deficit has been sustainable due to the country ability to repay its debts.

This has been seen when the country makes a commitment without having an effect on its economic policies. However, the sustainability the U.S. enjoys may not last for long. This is because its assets may lack favor in the near future. This may also because by lack of reforms in its fiscal policies. This is because of the country dependence on foreign capital inflows. This shows that sustenance is not possible once foreign investors retain their investment in the country. This will lead to an increase in the interest rates and thus affecting the economy negatively (Lampeer, 2007).

This puts the economy at risk due to this high dependence on foreigners to invest in the country. The massive trade deficits and macro imbalances may lead to global financial crisis. This is because the outflow of dollars from the united will be invested in the U.S capital markets. This will cause inflation in the property market and cause bubble burst situation in the subprime mortgage sector (Perelstein, J. (2009). Moreover, the effects will be seen based on the global dependence on the U.S trade deficit.

This is because trade deficit in the country acts as a means of maintaining liquidity in the financial market (Perelstein, J. (2009). This is because the dollar is the global reserve currency and international debt is controlled by the currency. Because of increased global integration, an imbalance in the U.S balance of trade will have far-reaching consequences by causing instability in the rest of the world. In conclusion, it is clear that United States for a long time has managed to maintain its trade deficits.

This is seen in its repayment programs, appetite of foreign investors to its assets, and demand for its dollars. Moreover, trade deficits have helped in U.S economic growth. However, it is clear this sustenance cannot last for long and thus demand for fiscal changes. Moreover, trade deficits need to be addressed to avoid in imbalance that may result to the financial crisis. Edward, S. (2005). Is the U.S. Current Account Deficit Sustainable? Retrieved from http://www.anderson.ucla.edu/faculty/sebastian.

edwards/w11541.pdf Higgins, M & Klitgaard, T. (2007). Financial Globalization and the U.S. Current Account Deficit. Current Issues in Economics and Finance, 13 (11), 1-7. Retrieved from http://www.newyorkfed.org/research/current_issues/ci13-11.pdf Lampeer, C. (2007). American Economics and Politics. New York: Nova Publishers. Mann, C. (2002). “Perspectives on the U.S Current Account Deficit and Sustainability,” Journal of Economic Perspectives, 37(1). 131-152. Perelstein, J. (2009). Macroeconomic Imbalances in the United States and Their Impact on the International Financial System.

Retrieved from http://www.levyinstitute.org/pubs/wp_554.pdf References