Question

Many think that the size of a trade deficit is due to a lack of competitiveness of domestic sectors, such as autos. Explain why this is not true.

Short answer

The size of a trade deficit is not due to a lack of competitiveness of domestic sectors, such as autos.

Step-by-step solution

Step 1. Trade deficit

When a country's imports surpass its exports in a fiscal year, it is considered to be in trade deficit.

Step 2. Explanation

As imports exceed exports, a trade deficit leaves a country with a large inflow of financial capital and a high labor cost. In addition, the US economy invests foreign capital in public welfare programs such as water, roads, railways, and hospitals, among other things.

As a result, the US economy has a competitive advantage in domestic public services that cannot be exported.

Thus, trade deficits in domestic sectors such as autos are caused by inflows of financial capital rather than a lack of competitiveness.