In November of 2004, the United States ran a fifty-four billion dollar trade deficit, translating to over 600 billion for the entire year. This deficit is a result of the disparity between the amount of goods that the US imports and the amount it exports. To equalize this deficit in its current account, the American government sells assets from its capital account, often to foreign investors. This phenomenon is seen as a serious threat to the success and continued growth of the nation’s economy, tied in with popular concerns that the United States is losing its competitive and dominant edge in global economics. The traditional economic theory employed to solve this problem calls for a return to mercantile protectionism, through use of
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The first proposed solution to this problem is one of protectionism, following mercantile guidelines to minimize imports and maximize exports. This is done through government intervention in the market in three primary methods, tariffs on foreign imports, subsidization of domestic industry, and devaluation of the US dollar. Free trade leads to specialization, and America is unable to compete with other nations in many sectors of industry. Countries such as China, Japan, and Mexico can produce many goods at far cheaper prices, making it very difficult for domestic producers to compete.
Tariffs deal with this problem in two coinciding ways. First, the price of these imported goods goes up because of the tax the importers are forced to pay. Therefore, the original advantage of the importers is defeated, and domestic producers are able to compete, or even dominate the foreign competition. Second, the government takes in revenue from the tariff, adding to the money in its current account. Therefore, by reducing the necessity for imports the deficit is lowered, and the government, reducing the need for foreign investment, makes more money. Subsidization, the second means of government protection, allows domestic producers to lower their prices, and to make their goods more attractive in foreign markets. Although the government pays the difference, the amount of exports increase, bringing in increased revenue and helping to decrease the deficit. The third method in this