US Trade Deficit

The U.S. trade deficit we read about most often is only one of several different trade balances reported in official statistics. It’s the merchandise trade deficit, which is actually the narrowest overall measure of America’s transactions with other countries. Thus, it can’t tell the whole story of our trade position with the rest of the world.
The merchandise trade balance, also called the bal­ance on goods trade, is the difference between the total dollar value of U.S. exports of tangible goods (like wheat and turbines) and the total dollar value of U.S. imports of tangi­ble goods (like t-shirts and auto parts) over a specific month, quarter, or year. When imports of tangibles are greater than exports of tangibles, then the trade balance is negative, and there’s a deficit.

The United States has posted a trade deficit since the 1970s since the end of the so-called gold standard, and it has been rapidly increasing since 1997 (see chart below). The US trade deficit hit a record high of 819.3 billion dollars in 2007, up from 787.1 billion dollars in 2005.
It is worth noting on the graph that the deficit slackened during recessions and grew during periods of expansion. Also of note, many economists calculate trade deficits and/or current account deficits as a percentage of GDP. The U.S. last had a trade surplus in 1991, a recession year. Every year there has been a major reduction in economic growth, it is followed by a reduction in the US trade deficit.

Import Certificates are an for idea for governmental economic intervention to fix a country's trade deficit. The idea was first proposed by Warren Buffett. In the United States, the idea was first introduced legislatively in the Balanced Trade Restoration Act of 2006. The proposed legislation was sponsored by Senators Byron Dorgan (ND) and Russell Feingold (WI), two Democrats in the United States senate. Since then there has been no action on the bill.
Buffet's plan proposes creating a market for import certificates that would represent the right to import a certain dollar amount of goods into the United States from other countries. These certificates would be issued to US exporters in an amount equal to the dollar amount of the goods they export, and can be sold to importers, who must purchase them in order to legally import goods. The price of an import certificate is set by free-market forces, and therefore ultimately is dependent on the balance between imported and exported goods through supply and demand.
Proceeds from the sale of import certificates would encourage exporters (who would gain that extra money in addition to the proceeds of their exports) and discourage importers (who would need to pay the additional cost to acquire import certificates as well as the cost to acquire the goods they are importing)
This system would essentially create a broad-based tariff on imports to the United States. Unlike traditional tariffs, however, this would not favour any particular industry or punish any particular country. Market forces would also keep the tariff at exactly the amount required to achieve trade balance, eventually eliminating it when it is no longer necessary.
As a theoretical concept, the idea could apply to other countries besides the United States, but Buffett argues that practical realities make it unlikely to succeed elsewhere. In particular, for any country which maintains a trade surplus the import certificates will be valueless.

The dollar has been losing value, weakening its status as the world’s major currency and setting off jitters in the international financial system. The falling dollar is not just a technical matter for financial market experts: trillions of dollars in value have shifted in the course of about eighteen months, reducing the reserves of the world’s central banks and knocking down the value of all US assets on the international marketplace. Analysts worry that a serious dollar selloff could create panic in the markets and lead to a global financial meltdown. Even if the worst-case is averted, a declining dollar may weaken the power of the United States, reorganize global markets and shift strategic power in the international system
After rising sharply against the Euro during 1999 and most of 2000, the dollar started to tumble in late 2001 and it continued its decline through mid-2003, losing more than a quarter of its value against the euro . After a brief rally in the summer, the dollar started another steep retreat that is likely to continue. Many financial analysts expected the dollar to weaken because of the growing US trade deficit on its “current account,” which includes goods and services, income payments such as interest and dividends and unilateral transfers such as foreign aid and worker remittances. But few thought the dollar would fall so far and so fast.
The U.S. trade deficit is the result of a net inflow of capital to the United States from the rest of the world. Because of our stable and relatively free domestic market, we remain the world's most popular destination for foreign investment. The US has become a net importer of capital because Americans do not save enough to finance all the available investment opportunities in our economy. This inflow of capital from abroad allows us to pay for imports over and above what we export.
In other words, the trade deficit is simply a mirror reflection of the larger macroeconomic reality that investment in the United States exceeds domestic savings. If we want to change the U.S. trade deficit the US must change the rate at which Americans save and invest.