US trade deficit jumped – Strong US Dollar is to blame?

December 30, 2016 – Trade balance of United States of America has widen in November 2016. Trade deficit in USA was already high, but now it has jumped more than 5%. Goods trade balance is minus 65 billion US dollars for the month of November, according to the report released by the US Bureau of Economic Analysis and the U.S. Census Bureau. Economists were expecting a decrease in trade deficit. October’s figures were minus 62 billion dollars; experts were expecting a 500 million dollars reduction in this month’s figure.

What is trade deficit?

One of the most important factors in a country’s economic growth is the amount of its exports. The higher this number is, the more money that country makes and its economy grows more. On the other hand, lower imports are good for a country’s economy. Every country imports goods, but if its imports value is greater than the value of its exports, then the trade balance is in negative. Meaning that the country is sending more money to other countries compared to the money it is making from its exports. A negative trade balance sheet is called Trade-Deficit. If a country’s exports generate more money than its imports, then that is called Trade-Surplus, or Positive-Trade-Balance.

The amount of exports is one of the ways in which a country makes money; its economy grows stably because more money is coming into the country than going out. In November 2016, trade deficit of United States of American fell more than 5%, from $-62 billion to $-65 billion; trade deficit increased by $3 billion dollars, which is a huge number! A part of current increase in US trade deficit is due to the fact that US dollar has gained strength. Dollar is trading against its major rivals, including Euro and British Pound, at record high levels.

What has US dollar’s strength have to do with the increase in trade deficit?

Let’s assume that a specific mobile-phone model is produced in UK and its price is £1. Now, importers from USA can import this mobile phone by paying approximately $1.225 because as I am writing this article, price of GBP/USD is around 1.22500. Few months back, GBP/USD was trading around 1.65000. To buy the same phone at that time, the same importers were paying ~$1.65 per item. The phone whose cost was once around $1.65 is now available for purchase for $1.225. So you can see why a stronger US dollar is beneficial for importers. On the other hand, exporters are generally unhappy when $ gets strong. This is because importers in other countries now have to pay more money to buy items from USA. For instance, importers in UK now have to pay more money, or British Pounds to buy an item compared to what they were paying few months back.

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