Question

The theory of gains from trade states that international trade is mutually beneficial to two countries trading together. If that is true, why is the U.S. running at a deficit and China a surplus? How does the ballooning U.S. deficit affect you personally? What changes could our government make which would help reduce this deficit?

Answer 1

The Theory of gains rightly states that the International trade is mutually beneficial to both the countries, if the two countries are trading together. However, the term ‘trading together’ includes a lot of variables and circumstances that needs to be met in order to trade together. In the case of the trade between the United States and China, the nature of trade is slowly becoming one sided, in the sense that China is starting to dominate the balance of trade between the two countries. If we focus on the trade between the two countries in the last 2 or three decades, we will see that the amount or number of exports from United States to China has been much lesser in comparison to the amount or the number of imports to United States from China. This directly means that US is importing more and exporting less. Moreover, the products or items of trade are also significant here. China has been importing mostly the raw materials from US and exporting the finished products. This is a huge margin. US exerting the raw materials would mean the export value of the raw materials would be much lesser, whereas US is importing the finished products, which are of a much higher value. All these factors have slowly created the imbalance of trade between the United States and China , and the United States today stands at a huge deficit of trade against China.

The ballooning US deficit does affect each and every citizen of the United States. We may not feel the direct impact, but it is hitting us indirectly and hitting us very hard. When there is a deficit balance of trade against United States, the US has been tying to bridge the deficit by paying off the deficit a number of times, which has caused the economic panel to suggest the Government to accrue the excess required amount of money from the public taxes. This has resulted in to several of our direct and indirect taxes to also balloon up. Moreover, in order to decrease the deficit, the Government has been trying to import less from China, which has also led to the prices of the products within the United States to balloon up in the last 2 or three decades. Since these changes happen at a comparatively slower rate, the normal citizen may not realize the direct impact of this deficit of balance of trade, but it definitely impacts us a lot.

The Government of United States must act vigorously towards the reduction of the deficit of the balance of trade with China. The Government may initiate several steps to do so. The Government will first need to create adequate labor force development committee which needs to take care of procuring more and more labor from the rural US areas and start producing more and more finished products within the United States. The more finished products that US produces within its own territory, the less it will be dependent on China for the same. This will make the US government to be in a position to reduce its import of such products. Moreover, the United States should compete with China in matters of the Quality of products, which are of prime importance in the market when it comes to the demand from the customers. With better quality of products are cheaper rates, US can compete with China to import those finished products with China, which may drastically bring down the deficit of balance of trade.