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Monday, February 22, 2010

CRS Issue Statement on the Trade Deficit and the Dollar

Craig K. Elwell, Coordinator
Specialist in Macroeconomic Policy

Marc Labonte
Specialist in Macroeconomic Policy

James K. Jackson
Specialist in International Trade and Finance

Carolyn C. Smith
Information Research Specialist

J. Michael Donnelly
Information Research Specialist

Jennifer Teefy
Information Research Specialist

Congress has a continuing interest in the trade deficit and its potential consequences for the national economy because of its constitutional role, through the general welfare and interstate commerce clauses, to promote strong and steady economic growth. In 2009, the trade deficit was near $400 billion, down from $705 billion in 2008, and from a high of $804 billion in 2006. A large portion of the decrease is the result of the strong dampening effect of the recent recession on U.S. import purchases and could be quickly reversed with economic recovery. 

The U.S. dollar fell about 23% from 2002 through 2009 as foreign investors gradually shifted away from dollar assets. This depreciation of the dollar was a principal reason for the trade deficits decrease in 2007 and 2008. If foreign investors continue to move out of dollar assets, the dollar would likely continue to depreciate, providing more downward impulse on the trade 

A falling trade deficit would help sustain economic recovery, but the associated reduction of the inflow of foreign capital could raise the borrowing cost faced by households, businesses , and government. Continued uncertainty in financial markets and economic weakness in the United States and abroad make the prospect for trade deficit and the dollar in 2010 difficult to judge.

Date of Report: January 11, 2010
Number of Pages: 4
Order Number: IS40400
Price: $7.95

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