US Debt Clock Figures Relations to US International Trade
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US Debt Clock Figures Relations to US International Trade
Summary
The paper examines the relationship that exists between some crucial US debt clock figures and the US international trade. It uses a cause-effect analysis to establish the link and profoundly explains the relations that exist between the national debt and foreign trade. The paper also examines Interest rate as an integral aspect of the national debt. Before the links are explained the study defines international trade and the US debt clock and the role they play in the country. The research further demonstrates the relationship that exists between GDP, trade deficit, and US international trade. The trade deficit is also exhaustively examined in the study because the term is commonly used in the foreign trade. The relationship that exists between money creation and international trade is incisively accessed and lays more emphasis on the money supply in relation to the international trade. Finally, the discourse examines relationships that exist between other key figures such as state revenue, budget items, the US workforce population, and international trade. The study looks into various International trade theories and concepts to support these relations, which are the absolute advantage theory by Adam Smith, the comparative advantage theory by David Ricardo, the Heckscher Ohlin theory of factor endowment, the Leontief paradox, Mersher and Lerner concept of devaluation, and the J curve phenomena. More emphasis was laid to establish the relationship between international trade and trade deficit by looking at the causes and means to reduce the trade deficit. The study concluded by stressing how international trade is vital to the critical economic figures in the debt clock.
Introduction
United States international trade is the interchange of capital, services, and goods between the US and other countries (Cooper, 2018). Foreign trade plays critical roles in the America economic development. Such functions include expansion of markets beyond US border, enabling maximum utilization of resources, increase in consumer goods variety, competitiveness regarding cost, opportunity to dispose of surplus production, peace and good relations between states, and exchange of technology and new ideas among many other advantages (Lutz, 2014). Theories which explain International trade are Adam Smith's absolute advantage theory, the mercantilism theory, David Ricardo's comparative theory, Heckscher Ohlin's factor production theory, Leontief's paradox theory, and modern trade theories.
On the other hand, the US debt clock is a real-time online billboard that displays the total national debt and each family share of it. Currently, the US national debt is approximately $21 trillion. The chart is displayed in New York City at One Bryant Park. The US debt clock contains various statistic figures of the country in addition to the national debt. The main components are money creation, revenues, interest paid, trade numbers, assets and liability, large budget items, GDP, US population, the workforce, unemployed, and the retirees. The clock is important in various ways. First, it shows how much the government owes its people, corporations, and other countries. Secondly, foreign debts show the amount of power other countries have over the United States and their interference in our sovereignty (Lutz, 2014). Finally, it helps the politicians determine if the debt ceiling has exceeded and this assists in creating counter policies to reduce or to raise the debt ceiling. Based on the presented brief, it is, therefore, imperative to examine the relationship between the US debt clock figures and international trade as well as indicate the means to offset trade deficit and to reduce the US debt since these are some of the important variables that dictate the dynamics of the nation’s economy.
US Debt, the Interest Rate Paid, and International Trade
US debt is the total outstanding obligations owed by the state to both internal and external borrowers, and this is the main component in the debt clock (Cooper, 2018). There is a strong relationship between the total debt that currently fluctuates at approximately $ 71 trillion and international trade. Debt affects international trade both positively and negatively.
High debt level in the United States has occasionally pushed the government to reduce imports due to the financial crisis created. The financial crisis is due to most of the country's revenue ending up paying foreign debts and, thus leading to cash flow problems in the country (Lutz, 2014). The government offers credit to various industries to boost exports that generate revenue used to repay such debts, therefore, causing an equilibrium in the balance of payments. The federal government also offers subsidies to special economic zones like export processing zones to reduce the trade deficit.
Debt causes the crowding out effect in an economy which in the long run affects international trade. When the state borrows domestically, the funds previously available for credit to investors reduce significantly. The crowding effect will also deflate domestic investment in the country such as the development of industries (Lutz, 2014). Most of the investments require the importation of machinery and various goods, but due to the crowding out effect in the country, imports will reduce significantly. In the long run, not realizing the maximum exports from such investments denies the state opportunity to offset the trade deficit. When the government uses domestically borrowed funds for recurrent expenditure instead of investments offsetting the crowding out effect in trade deficit is escalated (Lutz, 2014). For example, when America does not create productive industries to increase exports, it cannot counter the impacts of crowding out effect on the international trade.
Foreign debt may have a positive effect on international trade. Our country has borrowed severally to boost industrialization. Most investments have generated exports to various countries, a move that has enhanced favorable terms of trade. During the factories development, there is the importation of various machinery and human capital which in return improved international trade. The United States is more of a capital-intensive country than it is a labor one (Lutz, 2014). Therefore, borrowing is mandatory to ensure it develops very expensive industries to produce capital goods. Factor endowment is an advantage that has highly contributed to our country's ability to rip benefits from international trade. According to Hecksher-Ohlin theory, it is observed that America should export capital-intensive goods because it has a high endowment of capital than labor making capital-intensive products cheaper to produce (Lutz, 2014). The given scenario is partly the reason why the United States invests heavily in capital-intensive industries that require some level of debt to operate. Leontief objected the factor endowment theory and observed that the United States exports more of labor-intensive goods than capital goods (Lutz, 2014). However, the state continues to develop capital-intensive products because, recently, in 2017, the country exported approximately five hundred and thirty-three billion US dollars' worth of capital goods.
High debt level may discourage investors in the country and trading partners. A highly indebted state is more likely to enter into a financial crisis which will eventually affect International trade. The 2008 global financial crisis affected the trade tremendously. The economic shock in the United States, being an exporting country, limited the country's accessibility to capital, its expansion to new markets, the quantity of goods it exported and finally the number of products' destination countries. Trade exports in the US reduced by 0.3% in 2009 following the financial crisis leading to lower demand for foreign goods and this highly scaled down the imports (U.S. National Debt Clock, 2018).
Foreign debt affects the level of sovereignty in the country. The debt also lowers the state's rights in decisions making within its boundaries which may weaken the policy of protectionism that our country practices to cushion infant industries(Batra & Beladi, 2013). The country highly protects the farm product factories and apparel product factories. When the United States loses its sovereignty, such barriers may be compromised by liberalization imposed by the creditor countries.
High debt level may cause hyperinflation in the country, which will create disequilibrium in the balance of payment (Lutz, 2014). Inflation will lead to an increase in domestic products prices forcing US citizens to import cheaper products from abroad consequently causing a rise in imports. Similarly, the US products will be expensive making them unattractive to foreign countries, and this will lead to a reduction in exports thereby causing a trade deficit.
Another positive link between international trade and US debt stock is that it enhances cooperation and peace. A country indebted to another state has a debtor-creditor kind of relationship (Lutz, 2014). The ties would boost trade between the two countries even if they were previously enemies. A country may choose to pay monetary debt using goods such as oil, which indicates international trade. A good example is given by the relationship that exists between the United States and Russia. Russia is indebted to the United States and is still the 34th largest export destination for the US with $7 billion' worth of export in 2017. The two have been former enemies for centuries.
Interest paid to service loan stands at 2.9 trillion dollars (Lutz, 2014). The interest charged reduces foreign reserves because it is usually in foreign currency (Batra & Beladi, 2013). This interest minimizes the forex reserves hence the US dollar becomes weaker relative to other country's currency. It makes imports very expensive thus causing unfavorable terms of trade. The county keeps foreign reserves to cushion the US dollar and keep it at a fixed value compared to other currencies.
GDP, Trade Deficit, and International Trade
The country's GDP currently fluctuates at approximately 20 trillion dollars on the US debt clock (U.S. National Debt Clock, 2018). The GDP is highly related to international trade; in fact, a section of the GDP equation defines international trade.
GDP=C+I+G+(X-M). (X-M) = (EXPORTS – IMPORTS) =NET EXPORTS
Net exports directly involve international trade. This equation shows that international trade plays an important role in the GDP of a country and it happens in several ways (U.S. National Debt Clock, 2018).
International trade enables inflow of capital that allows production of consumption goods, which eventually increases the GDP (Lutz, 2014). International trade also leads to a growth in wealth which increases gross investment and ultimately raises the GDP amount. International trade also enhances technology inflow which boosts total investment and eventually increases the gross domestic product amount.
Exports increments the welfare of workers who earn from its proceeds. The better economic prosperity increases their autonomous consumption that may lead to a rise in appetite for foreign goods causing imports to inflate (Batra & Beladi, 2013). The worker's savings also surges causing gross investment to rise. High autonomous saving and consumption translate to a surge in the gross domestic product.
Some components of the gross domestic product also affect international trade. Increased consumption translates to a high demand for goods that the local market cannot support thereby causing imports to rise (U.S. National Debt Clock, 2018).. Moreover, when consumption of foreign countries increases, the United States is able to export more causing a rise in net exports. Investment is another gross domestic factor that affects international trade (Batra & Beladi, 2013). Increased investments lead to an increase in capital goods imports. In the long run, such investments will become productive, and there will be an increase in exports. Growth in government expenditure causes an inflation effect in the country because there is a lot of money chasing few goods. Inflation causes an increase in imports and a decrease in exports creating a disequilibrium of the balance of payment and a trade deficit.
Trade deficit fluctuates at approximately 828 billion dollars which means that the country net exports is a negative figure (U.S. National Debt Clock, 2018). The country, therefore, suffers from the unfavorable balance of payment. There is a strong link or cause-effect relationship between international trade and trade deficit. International trade can cause disequilibrium in the balance of payment or produce an equilibrium in the balance of payment. There are many causes of trade deficit. Increase in population is one of them. The people on the US debt clock currently fluctuates at 328 million people (Batra & Beladi, 2013). The high number translates to an increase in imports to cater to the population's needs. It is quite challenging to have an exportable surplus under such circumstances. Development programs is another cause of trade deficit (Batra & Beladi, 2013). Development programs require the US to import capital goods, raw materials and human resources that is highly skilled. Since this is a continuous process, it leads the US to a trade deficit (U.S. National Debt Clock, 2018). Demonstration effect is another reason for a trade deficit in the country which happens when the US citizens copy other countries fashion leading to an increase in imports from such countries. The exports may decline or remain constant; hence, a disequilibrium in the balance of payment (U.S. National Debt Clock, 2018). A natural disaster can cause an imbalance in the balance of payment by causing a decrease in industrial and agricultural production leading to a fall in exports (Lutz, 2014). Also, business fluctuations in a foreign state such as recession can reduce exports to that country from the United States thereby causing disequilibrium in the balance of payment. Change in trends, fashion and taste and preference for domestic goods by foreign country can create a trade deficit. Inflation can cause a trade deficit leading to a decrease in exports. Flight of capital recently observed during elections in the US can also lead to trade deficit. Another critical cause of trade deficit is the foreign exchange rate (Batra & Beladi, 2013). When a country's currency appreciates imports become cheaper and exports become expensive, an increase in imports occurs. When the US dollar devaluates exports grow cheaper than imports leading to an export surplus. Finally, price cost structure of local companies can cause a trade deficit. The trade deficit can also occur when a commodity's price rises due high cost of energy, raw materials, wages, environmental cost, and many other factors which make export expensive, leading US exports reduction (Batra & Beladi, 2013).
In order to ensure the reduction of trade deficit, the exports must be boosted and other measures taken during international trading. The measures include devaluation of the domestic currency, reducing inflation, tariff restriction, and export promotion, contractionary fiscal and monetary policy. Approaches to reduce trade deficit includes classic, income or Keynesian, and monetary approach.
Money Creation and International Trade
On the US debt clock, the monetary base currently fluctuates at approximately 3.5 trillion dollars up from roughly 400billion dollars in 2000 (U.S. National Debt Clock, 2018). The M2 money supply currently fluctuates at 14 trillion dollars up from 4.8 dollars in 2000. International trade has a key link with the money supply which is used both as a contractionary and expansionary monetary policy by the federal reserve of the United States (Batra & Beladi, 2013). Money supply affects international trade in three ways which are depreciation of the currency, inflation, and interest rates.
Depreciation occurs when there is an increase in the money supply in the economy. It causes the devaluation of the US dollars making exports cheaper than imports, and this will lead to increase in earnings from trading and reduction on import expenditure, even though this will depend on the price elasticity of both imports and exports (Batra & Beladi, 2013). When the sum of exports price elasticity and import price elasticity is greater than 1 the position of balance of payment will be favorably affected by devaluation, when it is less than 1 the position of the balance of payment will be unfavorably affected and when it is equal to 1, then there will be no effect on the stability of payment position. Mersher and Lerner developed the three conditions (Batra & Beladi, 2013). Economists have argued that there will be different effects on the trade balance in the long run and short run (Krugman, Obstfeld & Melitz, 2018). The J curve phenomena can explain it. The trade balance will first fall in response to depreciation and then rise in the long run (Batra & Beladi, 2013). There should be various conditions in place for devaluation to take place which are: no retaliation by the trading partners, the demand should be relatively elastic, a considerate structure of imports and exports, existence of exportable surplus and domestic price stability (Connolly, 2011). Income approach can be used to show how devaluation can improve a country's trade balance. The income or the Keynesian approach was developed by Sydney Alexandra who explained that there has to be an exportable surplus for depreciation to succeed. It explains trade balance as the difference between a states' produced total services and goods and its absorption by its citizen.
Inflation occurs when the money supply of an economy is increased. Deflation, on the other hand, occurs when there is a decrease in the money supply on the economy (Batra & Beladi, 2013). Inflation causes domestic products prices to increase. When the prices of local products rise exports become more expensive and they become unattractive to the international market buyers (Batra & Beladi, 2013). The scenario causes a reduction of the country exports. Contrary deflation causes a decline in the prices of domestic products making them attractive to the international markets hence export increases. Inflation creates unfavorable trade balance and disequilibrium in the balance of payment.
A decrease in interest occurs when there is a rise in the money supply in an economy because banks have more loanable funds (Batra & Beladi, 2013). Reduction in interest also leads to the country's currency value reducing because low interest is unattractive to foreign investors (Connolly, 2011). When the currency depreciates, the exports become cheaper and become attractive to the international market and, therefore, US export rises (Batra & Beladi, 2013). More loanable funds provide citizens with more disposable income, which causes an increase in consumption that may translate to more imports. The existence of loanable funds can also cause an increase in investment that translates to import of capital goods, technology and raw materials into the country (Connolly, 2011). The investments will increase exports in the long run.
Increase in interest rate occurs when there is a decrease in the money supply in the economy. This increment causes a reduction in liquidity in the economy causing interest rates to rise (Batra & Beladi, 2013). A high-interest rate is attractive to foreign investors, and this creates an inflow of foreign capital in the economy causing the appreciation of the US dollar. It makes exports unattractive and imports cheaper leading to a trade deficit.
Other Factors Influencing the US debt and International Trade
The state revenue currently fluctuates at approximately $ 1.6 trillion. The state revenue has some indirect link with international trade (Houk, 2018). Some of the state revenue is used in the development of industries that manufacture export goods hence boosting exports. The state revenue is also used in the creation of subsidies to exporters which boost international trade. Taxation highly finances State revenue (Houk, 2018). It reduces the disposable income which reduces the consumption by the US citizens, and this may eventually reduce the consumable imports. State revenue is also partly financed by tariffs which are used by the government to control international trade (Connolly, 2011). The government may impose import tariffs to regulate imports inflow and practice protectionism.
Budget items include Medicare (approx. $51 trillion dollars), social security (approx. $981 billion), defense ($620 billion), income security ($294 billion), net interest on debt $313billion), and federal pension ($260 billion) (Batra& Beladi, 2013). These budget items have various links with international trade. Medicare budget shows how heavily the US invests in healthcare (Krugman, Obstfeld, & Melitz, 2018). The Medicare budget has increased US exports of medical drugs to a tune of $20.1 billion regarding export (McWilliams, 2017). A healthy population also translates to increased productivity thereby increasing exportable surplus (Houk, 2018).
The defense budget indicates the government's investment in armory production and trade. The defense forces are also used to maintain political stability and world peace which boosts international trade. Net interest on debt reduces the foreign reserves of a country's forex reserve (Batra & Beladi, 2013). The net interest can cause inflation due to the instability of the local currency making domestic products expensive which eventually decrease exports and create a disequilibrium in the balance of payment (Krugman, Obstfeld, & Melitz, 2018). The interest paid reduces the revenue available for development, and this reduces productivity in the market; hence, decrease in exports.
The federal pension, which is paid out to retirees, boosts international trade through tourism. Most retirees tour around the world while purchasing various foreign goods and residing in luxurious hotels (Connolly, 2011). On the other hand, pension increases the disposable income to retirees, and this causes them to increase consumption of both domestic and foreign goods; hence, boosting imports.
The US workforce figure fluctuates at approximately 155.6 million compared to the unemployed that ranges from 6.2 million people on the US debt clock (Connolly, 2011). A large workforce translates to more productivity in the labor-intensive industries giving America an absolute and comparative advantage on various labor-intensive goods (Lutz, 2014). The increasing labor force increases exports of such products. A high population also translates to high domestic consumption that has to be sustained by both local goods and foreign goods and this increases the demand of foreign goods hence growing the exports (Batra & Beladi, 2013).
Conclusion
From an analytical viewpoint, the factors discussed above are all crucial in understanding the relationship between trade deficit, national debt figures, and international trade. Most importantly, it is clear that balancing international trade regarding imports, exports, and foreign debts is crucial in offsetting trade deficit and eliminating the crowding out effect. However, other factors such as the labor force and consumption patterns of US citizens also play a significant role in international trade. Hence, policymakers should consider all the factors discussed in this paper to formulate policies that will reduce and slow down the US debt significantly in the long run. The new plans should ensure that the economy is growing faster than its debts to provide sustainable growth in the long run.
References
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Houk, J. (2018). Inflation and international trade. Retrieved from http://ageconsearch.umn.edu/bitstream/17294/1/ar790057.pdf
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