There are two main things that every economy counts on; supply and demand. For some economies, supply does not keep up with demand and then this happens, international trade becomes the only option. Over the past decade, international trade has been growing despite any economic recessions and downtimes. However, it was in 2016 that world trade declined to $30.98 trillion from $32.27 trillion in 2015 (UNCTAD, 2017). Nonetheless, the rate of growth of global trade over the last three years was slower at an annual average of about 2 percent, which is much lower than the annual average of 10 percent between 1961 and 2013. As a result of the declining growth rate, the global economy is also growing at a slower rate. Until the global financial crisis of 2008, the rate of growth of world trade was 1.9 times faster than that of global economic growth (UNCTAD, 2017). Since then, the growth of world trade has been slower than that of the global economy.
The Two Types of Trade Flow That Underlie the Recorded Growth in World Trade
The two types of trade flow that underlie the recorded growth in world trade are importation and exportation. Importation refers to bringing goods or services into the country from another country (Gopinath et al., 2014). On the other hand, exportation refers to the shipping of goods from the country to another country so for trade and future sales. Both imports and exports are important determinants of world trade and thus have been responsible for the growth in world trade. In 2016, the biggest importer in the world was the United States with imports of goods and services totaling $2.7 trillion (Amadeo, 2017). Most of these imports are computers and consumer goods. On the other hand, in the same period, the biggest exporter was China with its exports totaling $2.2 trillion (Workman, 2017). Most of these exports are electrical machinery and equipment, computers, and consumer goods. The recorded growth in world trade, which includes imports and exports, is attributed to the reduced trade barriers and technological developments.
United States Imports
One of the largest contributors to world merchandise trade is the United States. As mentioned earlier, the United States is the biggest importer in the world. At 80 percent ($2.2 trillion), goods constitute a large percentage of imports with industrial machinery and equipment following at $444 billion (Amadeo, 2017). Finally, oil and petroleum products accounted for $144 billion of the total imports of the United States. Of the goods the United States imports, capital goods make up the largest proportion at $590 billion followed by consumer goods at $584 billion, and automotive vehicles and components at $350 billion (Amadeo, 2017). Foods and beverages are the smallest of the goods imports at $130 billion. Even though the United States exports billions in consumer goods, automotive products, and oil and petroleum products, it imports even more of these.
Services, on the other hand, make up 19 percent (about $502 billion) of the total imports of the United States (Amadeo, 2017). At $219 billion, travel and transportation services constitute the largest percentage of services imports in the United States. This is followed by business and computer services which stood at $139 billion, banking and insurance at $73 billion, and finally, government services at $21 billion (Amadeo, 2017). The large importation, as well as exportation in the United States, is supported by the various trade agreements with specific countries. These include bilateral trade agreements, multilateral trade agreements, and regional trade agreements. It is also important to note that most of the imports of the United States come from China and that China is the largest exporter in the world.
Net Export of the United States (2010 2015)
Exports, Imports, and Net Imports of the United States from 2010 to 2015 in trillion US dollars
2010 2011 2012 2013 2014 2015
Exports 1.28 1.48 1.54 1.58 1.62 1.50
Imports 1.97 2.26 2.27 2.27 2.41 2.31
Net Exports (0.69) (0.78) (0.73) (0.69) (0.79) (0.81)
Source: (Wits.worldbank.org, 2017)
From the figure above, it can be seen that the exports for the United States have been increasing from 2010 to 2014. However, in 2015, the exports decreased to $1.5 trillion from $1.62 trillion in 2014. Similarly, the imports of the United States increased from 2010 to 2014 but reduced from 2014 to 2015. The trend in the net export varied from year to year. It increased from 2010 to 2011 but decreased from 2011 through 2013. Eventually, it rose in 2014 and 2015. However, the important thing to note is that throughout the years, the net exports have been negative showing that the United States has had a trade deficit throughout the years. It is thus important to understand how this trade deficit affects the economy of the United States.
The trade deficits of the United States affects various sectors of the economy. These include real GDP, the rate of unemployment, the rate of inflation, and standard of living among others (McGee, 2014). The real GDP is the sum of consumer expenses, producer expenses, government expense, and net exports. Thus, when all the other factors are kept constant, and a country has a trade surplus, then the GDP will increase. On the other hand, if all the other factors are kept constant, and a country has a trade deficit, then its GDP will decrease. Thus, the trade deficit can result in a decrease in a countrys gross domestic product and at the same time a rise in the rate of unemployment (Bergsten, 2006). The rise in the rate of unemployment comes as a result of US citizens foreign products more than domestic products. On the other hand, the rate of inflation may increase or decrease depending on the variation of aggregate supply and aggregate demand. Finally, a trade deficit results in a higher standard of living for US residents in the short term since they can purchase a large variety of goods and services from abroad at lower prices. Nonetheless, it is important to investigate and analyze the trade deficit of the United States deeply to determine its short and long term effects and the benefits and threats that it brings to the nation.
Net Exports of the United States in relation to its GDP
Net Imports and GDP Growth Rate of the United States from 2010 to 2015
2010 2011 2012 2013 2014 2015
Net Exports (0.69) (0.78) (0.73) (0.69) (0.79) (0.81)
GDP Growth Rate 2.5 1.6 2.2 1.7 2.4 2.6
Source: (Data.worldbank.org, 2016)
Between 2010 and 2012, the trade deficit had an inverse relationship with the GDP growth rate. As the trade deficit increased, the GDP decreased, and as the trade deficit decreased, the GDP increased. However, between 2013 and 2015, it was the opposite as the trade deficit and GDP had a direct relationship. That is, when the trade deficit increased, the GDP increased and vice versa.
For the years 2010 to 2012, trade deficits seem to be decreasing the GDP growth rate. However, there are other factors that resulted in a decrease in the GDP growth rate rather than the trade deficit. Some of these factors include the value of exchange rates, consumer confidence, interest rates, and real wages. Many people have believed that trade deficit results in slow economic growth, but this is not usually the case as can be seen in the years 2013, 2014, and 2015. For the years 2013 to 2015, it is seen that economic growth drives trade deficits. They have a direct correlation. One of the explanations for this is that an expanding economy results in an increase in demand for not only the domestic products but also for those that are imported (Griswold, 2007). Additionally, the economic growth promotes domestic investment since businesses want to capitalize on the investment opportunities that present themselves as well as satisfy the rising demand of consumers (Griswold, 2007). The new investment opportunities attract foreign capital to the country to fund the investment which cannot be financed by domestic savings alone. These capital inflows are the ones that cause an increasing trade deficit. Thus, an increase in the GDP growth rate results in an increase in domestic investment as well as foreign capital inflows which in turn increases the countrys trade deficit (Griswold, 2007). A growing trade deficit does not result in faster GDP growth, but rather it is as a result of the GDP growth.
Measures to result in a Positive Net Export in the United States
The main method that the United States can use to reduce its trade deficit is through increasing the national saving. National saving refers to the difference between the countrys national income and what the country consumers. An increase in national saving implies that the output produced but not consumed can be used for investment purposes or exported to other countries (Shoven and Bernheim, 2009). National savings include government budget surplus, corporate retained earnings, and household saving. The main cause of low savings in the United States is the low savings by households which is less than 1 percent of disposable personal income. Corporate savings have been high due to the high level of profit. Finally, government deficit has been low at about 1.5 percent of GDP.
Trade deficit is also the difference between a countrys national investment and national saving. Currently, the United States invests more money than it saves resulting in the need for the country to import capital from abroad (Solow, 2016). Thus, the United States must have a capital account surplus. In turn, the imported capital results in citizens consuming more goods and services than is produced in the country and the remaining ones are filled in through a trade deficit. Saving is so low in the United States that the citizens have to import from other countries in order to have enough goods and services to invest in domestic businesses. When the United States saves more than it invests, such as the case with Japan, the country will be able to export its surplus savings as a net foreign investment (Christopher, n.d.). The money that will be sent to other countries as a foreign investment will come back to the country as payment for exports.
Conclusion
The growth in world trade over the years has resulted in increased global economic prosperity that has benefited both developed and developing countries. Countries which follow trade liberalization policies have been able to experience favorable effects of international trade and can be seen in countries such as China and India. International trade has opened the global market to businesses in both developed and developing countries and has made technology easily available to them. In turn, this has resulted in a healthy competition that is both in the global and domestic fronts. Businesses have been able to efficiently utilize the available resources and make their processes more efficient so as to ensure that they compete both locally and internationally. This has resulted in a host of opportunities for entrepreneurs and businesses all over the world which in turn has led to increased global economic prosperity.
Recommendation
The growth in world trade has brought about positive impacts to the global economy. However, there are certain things that go hand in hand with international trade so as to ensure that it brings about economic prosperity to both developed and developing nations. Some of these things include trade policies and political stability. For international trade to result in economic growth and prosperity, then there need to be flexible trade policies that favor the exchange of goods and services between countries. On the other hand, it is clear that political stability leads to a more effi...
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