Trade Deficits
...in foreign confidence and that a quick, uncontrolled drop in the dollar could upset world markets. The danger is the fact that America's big appetite for borrowing could push up global interest rates and thus slow global investment and economic growth. The Federal Reserve chairman, Alan Greenspan, stressed his concerns by telling the House Committee on Financial Services that "given the already substantial accumulation of dollar-denominated debt, foreign investors, both private and official, may become less willing to absorb ever-growing claims on U.S. residents." (Becker) The persistent rise in the trade deficit has been a little confusing because it shot up during the recent recession and accompanied the decline in the dollar, which fell 14 percent against a variety of 40 other currencies. The main focus of our deficit has been with China. The United States deficit with China rose to a record $124 billion and to $94.3 billion with the European Union. It shrank by $4 billion with Japan, to $66 billion. Imports from China are 5.7 times the value of American exports to China. This is a gap that many people say is caused by China's refusal to float its currency and to allow the price of its exports to rise. As foreigners collect their returns from owning U.S. assets, our current trade deficit could be followed by a trade surplus if foreigners choose to consume their returns or invest them outside the U.S., but these choices and a resulting trade surplus are not to be expected. Foreigners could continue to reinvest their returns here. Many U.S. assets are owned by foreigners who do not want to send back profits but to accumulate even more assets in the U.S., where private ownership rights are relatively more secure than in their home countries. (Becker) The U.S. trade deficit is the result of a net inflow of capital to the United States from the rest of the world. Because of our stable and relatively free domestic market, we remain the world's most popular destination for foreign investment. We have become a net importer of capital because Americans do not save enough to finance all the available investment opportunities in our economy. This inflow of capital from abroad allows us to pay for imports over and above what we export. As a consequence of the trade deficit, m...