Is The Trade Deficit Affecting Small Business?

Is the growing trade gap in the United States hurting American companies and increasing their need for business financing? It is a well known fact that the United States continues to have alarming trade deficits with many different countries. At the top of the list impacting the U.S. deficit is China. In 2015 the U.S. trade deficit with China hit approximately 337 billion when you deduct the trade surplus of 29.5 billion from the U.S. services exports to China. In 2019 the trade deficit with China has grown even more significantly. Although China is the largest contributor to America’s trade deficit, it is not the only country the U.S has a trade deficit with. The U.S. also has trade deficits of approximately 50 billion dollars or more with Japan, Mexico, and Germany based on earlier data. There are also many other countries that the U.S. has trade deficits with in the billions.

The overall trade deficit for goods and services in the U.S. in 2015 was over 530 billion, a significant increase from the 505 billion in 2014, although there has been some recent narrowing of the gap. Manufacturing is always at the center of the issue because the merchandise or goods deficit without considering services is the largest part of the deficit. The goods trade deficit for 2014 was approximately 741 billion and peaking at almost 760 billion in 2015. The trade in services is the bright point of the trade balance as it is trading at a surplus. In 2014 the trade surplus for services was 231.8 billion and just shy of that in 2015 at 227.4 billion. However, the goods trade deficit is so large and continually growing that the trade surplus which was down year over year offers little relief. Also, recent numbers have shown that the overall trade deficit in 2019 was at 621 billion.

So what exactly is a trade deficit?

The trade balance consists of exports or goods and services that are produced domestically by a given country (The U.S. for purposes of this reading) and sold to other countries. These exports produce income as well as jobs for a country as the need for manufacturing and services grows. On the other side of the spectrum are imports, or goods and services that are produced by other countries and purchased by a given country. The trade balance will have a surplus or deficit depending on whether or not more products and services are bought than sold or vice versa by the given country; the trade balance whether positive and at a surplus, or negative and at a deficit is the difference.

How does a trade deficit affect American businesses?

One of the most common beliefs is that trade deficits result in job losses and companies downsizing, and in some extreme cases companies going completely out of business. As an examples, in an earlier article economists pointed out how a sharp decline in U.S. manufacturing beginning in 2000 and continuing for more than a decade coincided with huge growth in China imports. It is simply too hard for domestic manufacturers to stay competitive in markets when foreign countries can offer the same or similar products at a significantly lower cost. The reason many foreign countries can produce products at lower prices is because they offer their employees lower wages, and they have less safety and regulatory restrictions for both health & safety standards and the environment. The end result is a much lower price for the foreign country to produce goods which in turn leads to more exports by that country, and at the other end the domestic companies begin downsizing or failing because there is less of a need to produce products that can be imported for much cheaper.

There are countless companies in the U.S. that discuss the pressure put on their companies by cheaper imports. Many of these business owners find themselves failing to pay creditors, and utilizing credit cards and business loans to stay afloat. It is a domino effect and the resulting pain and loss that companies and workers in the U.S. are experiencing was at the center of the presidential election. Many business owners and their employees voiced their frustration and financial difficulties as a result of the manufacturing and ultimate imports of foreign goods and services.

Most small and medium sized business owners that are being affected in one way or another by the trade deficit have no idea what the deficit actually is, or where most of the goods or services are coming from. To make matters worse, there are so many arguments by expert economists for both the good and bad of trade deficits that it is almost impossible to come to a definitive answer on whether or not deficits are healthy for an economy. In an effort to inform business owners of the actual data we have created an easy to read infographic that highlights the main statistical points of the U.S.Trade Gap and America’s recent trade data between America’s top 30 trading partners. Do you think that your business is being affected by trade? Have a look at the infographic below.

Financial Effects of Trade on Small Business