The U.S. Trade Deficit

At the end of the 20th century, a growing trade deficit contributed to American ambivalence about trade liberalization. The United States had experienced trade surpluses during most of the years following World War II. But oil price shocks in 1973-1974 and 1979-1980 and the global recession that followed the second oil price shock caused international trade to stagnate. At the same time, the United States began to feel shifts in international competitiveness. By the late 1970s, many countries, particularly newly industrializing countries, were growing increasingly competitive in international export markets. South Korea, Hong Kong, Mexico, and Brazil, among others, had become efficient producers of steel, textiles, footwear, auto parts, and many other consumer products.

As other countries became more successful, U.S. workers in exporting industries worried that other countries were flooding the United States with their goods while keeping their own markets closed. American workers also charged that foreign countries were unfairly helping their exporters win markets in third countries by subsidizing select industries such as steel and by designing trade policies that unduly promoted exports over imports. Adding to American labor's anxiety, many U.S.-based multinational firms began moving production facilities overseas during this period. Technological advances made such moves more practical, and some firms sought to take advantage of lower foreign wages, fewer regulatory hurdles, and other conditions that would reduce production costs.

An even bigger factor leading to the ballooning U.S. trade deficit, however, was a sharp rise in the value of the dollar. Between 1980 and 1985, the dollar's value rose some 40 percent in relation to the currencies of major U.S. trading partners. This made U.S. exports relatively more expensive and foreign imports into the United States relatively cheaper. Why did the dollar appreciate? The answer can be found in the U.S. recovery from the global recession of 1981-1982 and in huge U.S. federal budget deficits, which acted together to create a significant demand in the United States for foreign capital. That, in turn, drove up U.S. interest rates and led to the rise of the dollar.

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This article is adapted from the book "Outline of the U.S. Economy" by Conte and Carr and has been adapted with permission from the U.S. Department of State.