U.S. Quarterly Trade Deficit Was the Smallest in 14 Years
The article appearing in The New York Times editorial on March 19, 2014 details the massive decrease in the United States’ current account deficit to reach the lowest level ever seen in 14 years. This number stood at just 81 billion dollars, down from 96.4 billion dollars the previous quarter. The decline has been attributed to increases in exports and overseas investment income (The Associated Press 2014).
Exports were boosted by increased sales of petroleum and agricultural products abroad, which recorded a 1.9% increase. The returns from overseas investments also rose by 2.4% to boost the figure further. This brought the current account deficit to stand at only 1.9% of the country’s Gross Domestic Product, the lowest it has been since 1997.
One of the major economic activities that have contributed significantly to narrowing the gap is the increase in efficiency of oil and gas drilling. Innovations in this industry have enabled the utilization of new drilling technologies. The impact of this is that drilling activities are now being conducted where they previously would not, such as, in North Dakota and Pennsylvania. This has helped in lowering petroleum-related imports and boosting exports overseas.
The other significant event contributing to the decrease in the deficit relates to local and foreign investments. The reduction of local interest rates in the United States has led to a reduction in the amounts foreigners are receiving as investment income. On the other hand, the payments received by Americans on their investments abroad have been increasing. This, therefore, causes a reduction in the deficit further.
The current account is a measure of a country’s trade, which is broader than the conventional exports and imports. It also incorporates the net factor income, which is net income from investments abroad with fewer payouts to foreign investors. These payouts are usually in the form of interest from an investment in bonds and dividends from stocks investment. Cash transfers occurring during the period in consideration also form part of the current account. These include remittances both in and out of the country and also foreign aid, although this forms a smaller component. A surplus or deficit is therefore dependent on the relative amounts of these components. It is also important to note that both government and private payments are considered in the deriving of the figure.
A surplus in the current account indicates that the country is a net lender due to more cash outflows than inflows and vice versa. A deficit in the current account may also show that the country’s imports are exceeding its exports, which is a negative signal for the economy. Therefore, a reduction in this deficit is a desirable outcome for the economy since it increases the country’s stock of foreign assets by the amount of the decrease. However, deficits may sometimes be necessary and even advantageous in some circumstances. One such example is when foreign funding is used to finance investments that have the potential of having a higher return rate than the one to be paid for the loan.
There exists a variety of potential methods for reducing the current account deficit. One of these methods is increasing the value of exports as compared to imports. This increases foreign income and reduces the deficit. The government can also intervene by putting in place policies to stimulate exports from local producers. The decrease in the deficit in the United States is commendable and it remains to be seen whether this trend will be maintained.
The Associated Press, March 19 2014. U.S. Quarterly Trade Deficit was the smallest in 14 years. The New York Times.