One measure of a country's economic health and stability is its balance of trade, which is the difference between the value of imports and the value of exports over a defined period. A positive balance is known as a trade surplus, which is characterized by exporting more (in terms of value) than is imported into the country. A negative balance, which is defined by importing more than is exported, is called a trade deficit or a trade gap.

A positive balance of trade or trade surplus is favorable, as it indicates a net inflow of capital from foreign markets into the domestic economy. When a country has a surplus, it also has control over the majority of its currency in the global economy, which reduces the risk of falling currency value. Although the United States has always been a major player in the international economy, it has suffered a trade deficit for the last several decades.

History of the Trade Deficit

In 1975, U.S. exports exceeded imports by $12,400 million, but that would be the last trade surplus the United States would see in the 20th century. By 1987, the American trade deficit had swelled to $153,300 million. The trade gap began sinking in subsequent years as the dollar depreciated and economic growth in other countries led to increased demand for U.S. exports. But the American trade deficit swelled again in the late 1990s.

During this period, the U.S. economy was once again growing faster than the economies of America's major trading partners, and Americans consequently were buying foreign goods at a faster pace than people in other countries were buying American goods. The financial crisis in Asia sent currencies in that part of the world plummeting, making their goods much cheaper in relative terms than American goods. By 1997, the American trade deficit hit $110,000 million and heading higher.

Trade Deficit Interpreted

American officials have viewed the U.S. trade balance with mixed feelings. Over the last several decades, inexpensive imports have aided in the prevention of inflation, which some policymakers once viewed as a possible threat to the U.S. economy in the late 1990s. At the same time, many Americans worried that this new surge of imports would damage domestic industries.

The American steel industry, for instance, was worried about a rise in imports of low-priced steel as foreign producers turned to the United States after Asian demand shriveled. Although foreign lenders were generally more than happy to provide the funds Americans needed to finance their trade deficit, U.S. officials worried (and continue to worry) that at some point those same investors might grow wary.

If investors in American debt change their investing behavior, the impact would be detrimental to the American economy as the value of the dollar is driven down, U.S. interest rates are forced higher, and economic activity is stifled.