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America: Home of the debtors?

By Micah Rimmer
web posted November 8, 2010 

In this day and age, we are able to communicate with the world within seconds.  While foreign trade has been around for centuries, it wasn't until recently that it has become so easily accomplished.  It took Marco Polo twenty-four years to travel to Asia, trade with the people there, and return home.  Today, that trip would take less than a day, and the money could be wired into an account within seconds.  Today, foreign trade is a very normal occurrence.  However, just like anything else, too much of a good thing, can become a bad thing.  When you consume too much sugar, an essential chemical that your body requires for energy production, you become unhealthy, when you inhale too much oxygen too quickly, you acquire oxygen poisoning. When you drink too much water, you die of hyper-hydration.  The same principle can be applied to economics.  From a business' point of view, if you have too much of a good, the price will drop.  The more you supply, at the same demand, the more the price drops.  So how can foreign trade possibly be a bad thing?  The problem lies in trade deficits.

First off, let's define trade deficits.  Trade deficits are basically when a country imports more than it exports.  That means that the country's money is going somewhere else.  The country with the deficits is injecting its money into another country's economy.  The other countries can then buy government bonds, or other IOUs from the country with the deficit.  Eventually, if the country continues to have trade deficits, the economy will fall into a recession, and after a while, a depression.  So why are bonds such a big deal?  Say we have two countries, Country A, and Country B.  Country A develops a trade deficit from Country B.  Country B then buys Country A's bonds with the extra money it receives.  If Country A continues to have trade deficits, Country B continues to accumulate bonds.  When Country B finally cashes in its bonds, Country A will lose a nice portion of its money to Country B, and will not have enough left to support itself.  Country A will then continue to spiral out of control until it reaches rock bottom.  See why yearly trade deficits are bad?

America is one of those countries that has had its fair share of trade deficits.  So how can we stop the economy from spiralling into a recession?  One way we could help this problem would be to reduce imports.  We can't just cut imports, America still has the same demand for its consumer goods as it did before so you wouldn't be able to just stop importing certain goods right?  Wrong.  One resource we would easily be able to cut back on imports would be oil.  America has a massive supply of oil that it isn't even using.  Where could this oil possibly be you say?  In Alaska.  If we were to drill in Alaska we would be able to cut back on oil imports, as well as possibly, exporting oil if we had a surplus.  So why don't we drill in Alaska?  You tell me!  Some animal rights activists say it isn't right, and that we're hurting the wildlife in Alaska by drilling.  We aren't even hurting the wildlife in Alaska by drilling.  Some might actually argue that we are helping the wildlife!  How is this?  Some reports have found that the Caribou in Alaska are actually using the oil pipes as a source of warmth!

Another problem with the trade deficits is the loss of jobs.  You might ask what trading with a country has to do with unemployment.  You'd be surprised.  When we have a trade deficit, our extra money goes to other countries.  We don't have enough money left over for our high paying jobs, and eventually the highly paid employees would lose their jobs.  A solution in this problem could lie in the hands of increasing our exports.  An increase in exports would decrease the deficit, or get rid of it all together.  So how do we increase exports?  Lower corporate taxes.  If we lower corporate taxes, it will make it cheaper for businesses to operate.  The businesses can then create cheaper products that will compete with foreign products.  This will increase the demand for American goods, and, in turn, increase total production.  Another way to increase exports would be to invest more in American technological research.  An increase in technology would decrease production costs, which could increase total production.  An increase in total production would then create a larger surplus that could be devoted to more exporting.

So if increasing exports and decreasing imports are what we need to decrease trade deficits is there anything else we can do?  Yes.  If we were to establish more tariffs, the U.S. could work its way out of this situation.  A tariff is when a country imposes a tax on its own imports.  Taxing imports would discourage people from importing goods in an attempt to even out the playing field.  It makes it cheaper to operate businesses in the United States, as opposed to operating businesses in other countries, and importing goods into the United States.  If businesses were moved to the United States from foreign countries, not only would imports decrease, but coincidentally exports would also rise.  More businesses would produce more goods.  Technological research would also rise, because more workers are figuring out more efficient ways to produce goods.

So there you have it.  America is in a pickle.  We have to break the trade deficit cycle if we want this country to thrive.  This cycle can be broken by either increasing exports, or lowering imports.  Both of these solutions have credibility.  Trade deficits aren't incredibly bad.  A build up of trade deficits are bad.  If we don't break the cycle soon, the value of the dollar will drop, and inflation will set in.  This cycle can be broken, but we need to act soon. ESR

Micah Rimmer is a home-schooled high school student. This is his first contribution to Enter Stage Right. © Micah Rimmer

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