Meltdown 101: How'd we get this trade deficit?

[November 14, 2008]  VIENNA, Austria (AP) -- When it comes to everything from oil to olives, the U.S. buys more from other countries than it sells to them.

That's why we have a trade deficit -- the gap between the dollar value of U.S. exports to other countries and the value of everything imported to the U.S.

The U.S. has had a trade deficit for most of the last 30 years, as the country started buying more goods manufactured abroad. (There was a brief surplus in 1992.)

The sharp rise in oil prices since 2004 widened the deficit, since that meant we were sending more dollars overseas for each barrel of oil. The related decline in the dollar for much of that stretch exacerbated the deficit further by making imports more expensive for Americans -- though it simultaneously kept the deficit from getting too big, since a weak dollar means American exports are cheaper for the rest of the world.

The recent decline in oil prices will help ease the trade deficit, but won't erase it. As of Thursday, the trade deficit in September was $56.5 billion, down from $59.1 billion in August.

Here are some questions and answers about the trade deficit.

Q: What counts as trade?

A: Some of what's traded is obvious: stuff. Barrels of oil from Saudi Arabia and containers of coal from West Virginia. Jet engines, TVs, steel beams, toy trains, DVDs, lumber, diamonds, canoes and pens. Tomatoes from Mexico and chocolate from Belgium. Tracksuits from China and cashmere scarves from Scotland. Nuclear fuel materials.

Also included are royalties and licensing fees. These increased by $900 million between July and August, coinciding with the Beijing Olympics.

Some of the less obvious components are the cost of freight and port services and travel and passenger fares. If you fly to Spain on Iberian Airlines, you're part of the trade deficit.

Q: With which countries does the U.S. have the largest deficit?

A: The U.S. bought $27.8 billion more goods from China in September than it sold, $13.4 billion more from nations in the Organization of Petroleum Exporting Countries, $8.3 billion more from the European Union and $7.8 billion more from Canada.

The U.S. also has trade deficits ranging from more than $5 billion to $700 million with the following countries, listed in order starting with the largest deficit: Japan, Mexico, Venezuela, Nigeria, Taiwan and South Korea.

Q: Are there any countries the U.S. doesn't have a trade deficit with?

A: Yes, but those surpluses are nothing to brag about. In August, the U.S. had a $1.7 billion trade surplus with Hong Kong, $900 million with Singapore, $800 million with Australia and $200 million with Egypt.

Q: What's caused our trade deficit?

A: There's political debate about what's behind the trade deficit, but there are factors everyone agrees on. Most notably: The price of oil, which quadrupled between 2002 and 2006, accounted for half the deterioration in the trade deficit during that period, according to the Federal Reserve Bank of San Francisco.

Beyond this, opinions are split. A report in 2000 from a congressional committee on trade deficits issued two statements -- one Republican, the other Democratic -- on what caused the deficit. Greatly simplified, Republicans said the deficit increased as U.S. wealth increased and Americans bought more, while Democrats blamed a low U.S. savings rate and a decline in manufacturing.

Q: Why does the trade deficit matter?

A: You can think of the trade deficit as a measure of how well U.S. companies are doing relative to their overseas rivals -- especially rivals that sell a lot of goods to Americans. A big trade gap might mean, for example, that Japanese and European automakers are selling lots of cars in the U.S. -- while American car companies are doing little business in foreign markets.

[Associated Press; By ELLEN SIMON]

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