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The USA has a huge trade deficit, however there are a few things people tend to forget, or never consider, regarding trade:

1) Imports make us rich. Yes, that's right, it is imports which increase the material wealth stock of a country. Exports are the price we pay so we can afford imports.

2) Free trade makes both parties wealthier. Bearing in mind that in an environment of free trade a transaction will only take place so long as both parties value the other party's product more then they do, in any trade both parties are better off as a result.

3) Exchange rates are self balancing. A country with a free floating exchange rate will adjust to changes in trade patterns. If America runs a big trade deficit the currency will devalue to make exports more competitive. The deficit has only been sustained by large capital inflows from abroad financing the equally large budget deficit. In other words foreign countries like China are lending money to the USA government to spend (i.e. buying USD), which keeps the value of USD artificially high. This money is spent by the government and in turn ends up in peoples pockets who buy products from China.

So we can see that deficits are not bad in themselves. An artificially strong USD caused by the budget deficit effectively cuts the cost of imported goods which helps all consumers. Of course on a large scale this will have a short term impact on jobs in those sectors vulnerable to competition from other countries.

The best way to begin to correct the deficit is to regain fiscal control and return to near-balanced budgets. This will necessarily require either a massive cut in spending or a massive increase in taxes, neither of which are politically popular. Alternatively American consumers can just enjoy the cheap imports, low taxes and high government spending being effectively paid for by China and let the economy adapt naturally by moving from vulnerable industries into higher-skilled ones.

In the short term the political climate may allow for some realism over tax and spending as Americans worry over jobs, but ultimately economies will adapt to the situation of the world markets. Either you go with the flow or try desperately and unsuccessfully to try and swim against the tide.

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