Why U.S. Trade Deficit Is an Important Issue

The United States' trade imbalance with the rest of the world, known as the current account deficit, is the soft underbelly of the booming U.S. economy. The account, which measures the flow of goods, services and investments to and from the U.S., posted a record $338 billion deficit in 1999, it was announced Wednesday, having surged by $100 billion since 1998. That deficit, of course, is a symptom of America's unparalleled prosperity in a world economy still recovering from the Asian economic meltdown — the U.S. economy's roaring 6 percent growth rate makes it a voracious consumer of imports, while world markets remain sluggish when it comes to buying American products. But while it may be a symptom of U.S. good times, the current account deficit also threatens bring those good times grinding to a nasty halt.

"It's rising at an unsustainable pace, making it perhaps the most serious problem facing the U.S. economy today," says TIME senior business writer Bernard Baumohl. "When America's foreign debt surges, foreigners are forced to hold more dollars. If they begin to dump those for fear of being overexposed, that would drive down the value of the dollar and make imports even more expensive, which would bring inflation. But the only way to convince nervous creditors to hold on to dollars may end up being to raise interest rates in order to give them a better return on their holdings, and that could just as easily slow the economy."

The current account deficit may be too complex to become an election issue, but if it continues its current surge it could become the economic cloud that rains heavily on the next presidency. The problem is partly a product of the new pattern of U.S. manufacturing: Some 40 percent of U.S. imports are goods manufactured overseas by U.S. corporations. "The best hope for relief is that Japan, China and other Asian governments manage to revive their economies and drop remaining trade barriers so that they buy more goods and services from the U.S.," says Baumohl. But while America waits and hopes for that to happen, says Baumohl, the trade deficit "may well be interpreted as a sign the U.S. economy is growing too fast." In other words, that times have been toogood.