La Solución to the U.S. Trade Deficit?

Americans have long bought more from other nations than we’ve sold to them.

In fact, trade deficits for the U.S. have been a constant since the 1970s, swelling to more than $750 billion in 2006. But the gap between imports and exports has been narrowing since then. Just today, as the New York Times reported, the government announced that “the American trade deficit shrank unexpectedly in April after the United States sold $175.6 billion in goods and services overseas, the most exports on record.”

One area of steady growth in exports has been in the realm of services. Although the U.S. bought $500 billion more in goods than it sold in 2010, it sold $150 billion more in services than it bought.

Peter Drucker felt that a country’s balance of trade was important for businesses to understand, and he stressed that service exports were a hidden strength. “The trade deficit that is daily bewailed by our newspapers, our businessmen and economists, our government officials and our politicians is a deficit in merchandise trade,” Drucker wrote in Managing in a Time of Great Change. “The United States has, however, a very large surplus in services trade. It is being generated by financial services and retailing; by higher education and Hollywood; by tourism; by hospital companies; by royalties on books, software, and videos; by consulting firms; by fees and royalties on technology; and by a host of other businesses and professions.”

[EXPAND More]Still, Drucker didn’t count on service exports to close all of the trade deficit. Where he did see a potential remedy, rather, was somewhere less expected: Latin America. “There are, in effect, only two ways to cut the trade deficit,” Drucker wrote in his 1992 book Managing for the Future. “In the wrong but traditional way, a very sharp recession cuts domestic consumption by 10% or so. The alternative: a revival of Latin America as a customer for U.S. manufactured goods…Few U.S. businessmen would name Mexico if asked who America’s main trading partners are. Yet last year it ranked No. 3, behind Canada and Japan.”

Today, only Japan has exited that triumvirate (having been replaced by China). Mexico remains our No. 3 trading partner and our No. 2 export market.

How do we close our trade deficit? Is a healthier Latin America the secret weapon?[/EXPAND]