Dollar Depreciation and Trade Deficit in the USA

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Table of Contents

Introduction
Why Dollar Depreciation May Not Close the US trade deficit
Other factor that can change the trade balance in the US
Conclusion
References

Introduction

The United States trade deficit has been on the rise recently and concerns about the factors contributing to this effect are emerging. Some argue that the situation can be best handled through depreciation in the value of the dollar. However, there are some people who feel that the fall in the dollar value cannot single-handedly solve the trade deficit issue. This paper seeks to prove that the trade deficit in the US cannot be reduced by a fall in the dollar value.

Why Dollar Depreciation May Not Close the US trade deficit

The United States of America is struggling to maintain its competitiveness in the international market and specifically in the import-export business. American producers are facing difficulties considering the country has been importing more that it is exporting. Observers and economist alike foresee a situation whereby the dollar value might reduce if the situation is not addressed in good time. Goldberg and Dillon warn that the American appetite for foreign goods may lead to unsustainable increase in the cost of imports (2007). It has been projected that a fall in the value of the dollar might lead to a rise in demand for Americas exports (Goldberg & Dillon 2007). Nonetheless, this adjustment may not necessarily translate into a deficit imbalance in the US economy.

A weaker dollar can have two major implications on the national trade deficit. One of the major effects of this will be the fall in the demand for foreign goods. With a weak dollar, the demand for foreign goods will fall significantly due to the rise in importing costs. On the other hand, a weaker dollar will boost foreign demand for Americas exports (Goldberg & Dillon 2007). The rise in demand for American exports will definitely make the countrys export prices more competitive (Goldberg & Dillon 2007). This argument is the most sensible explanation to prove why depreciation may not necessarily translate to a close in the trade deficit.

Examining the empirical evidence given by the two authors, one can only agree that Goldberg and Dillon are making sensible arguments. Arguing that the dollar depreciation will lead to a close in the trade deficit will be creating assumptions that import-export imbalances depend on the dollar strength. However, there are several other factors that influence the nations trade balance adjustment (Geringer, Minor, & McNett, 2012). As a factor on its own, dollar depreciation alone cannot close the trade gap.

Other factor that can change the trade balance in the US

The trade balance of any nation is the difference between its exports and imports values (Geringer et al., 2012). An ideal balanced trade is achieved when the export value surpasses the import value. There are many factors that can influence this difference. In the American case, several factors have led to the increasing gap between the exports and imports value. One of the major factors is the unique function of the dollar in invoicing international trade transactions (Geringer et al., 2012). The dollar is used worldwide to transact business between major world-trade partners. This gives the dollar a unique demand around the globe. Other factors include the market competitiveness of the foreign exporters as well as the high cost of distribution incurred by the US government (Geringer et al., 2012).

Conclusion

This paper has discussed and proved that dollar depreciation cannot singlehandedly close the trade deficit in the United States. The paper has sought to justify its position through empirical evidences given by Goldberg and Dillon. In the paper, other factors that can cause that help in closing the trade deficit apart from the dollar depreciation have been discussed.

References

Goldberg, L., & Dillon, W. (2007). Why a Dollar Depreciation May Not Close the U.S. Trade Deficit. Current Issues in Economics and Finance, 13 (5), 246-265.

Geringer, M., Minor, M., & McNett, J. (2012). International Business, Custom. New York, NY: McGraw-Hill.

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Dollar Depreciation and Trade Deficit in the USA

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