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Solutions to Trade Deficits
Solutions:
Decrease federal deficit
The US needs to decrease its
Federal deficit, and in doing so decrease its trade deficits. According
to the 2006 Economic Report of the President, the trade deficit
decreases by twenty cents for every dollar the federal deficit is
decreased. In this sense, the
decrease must be about $630 billion to bring the trade deficit down to a
sustainable level.
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Asian economies must stop pegging
their currency to the US dollar
Another solution requires Asian
economies to stop
pegging
their currencies to the US dollar. This will make our imports from Asia
more expensive and our exports to Asia cheaper, thus balancing our trade
deficit. For instance, if China would discontinue pegging the Yuan to
the dollar, the Yuan would appreciate and Chinese goods would become
more expensive. This would most likely result in fewer Chinese goods
bought in the US and more US goods bought in China, and hence the trade
deficit would decrease. Unfortunately, this is extremely difficult to
change since China depends on exports to the US to sustain its economic
growth.
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Depreciation of the US dollar
If the value of the US dollar
starts decreasing in relation to other currencies, the trade deficit
will eventually decrease as import goods become more expensive in the US
and American goods appear cheaper abroad.
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The rest of the world must grow faster
than the US
According the
Economic
Report of the President,
in order for trade gaps to close other countries must grow faster.17
When countries experience fast economic growth its residents
have more income, and thus they consume more. This causes their imports
to rise. This in turn helps balance the trade deficits. Despite the
fact this is true, it is certainly not a viable solution for the US to
rely on to remedy trade deficits. The US cannot depend on the rest of
the world to just “hurry up and grow” so that the US trade deficit
decreases. A more domestic, and aggressive stance must
be taken now.
For an example see the tequila crisis.
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