The U.S. Trade Deficit in goods reached $65.1 billion last month, as exports fell 1.3 percent. Exports of Motor Vehicles fell an impressive 8 percent according to statistics supplied by the US Commerce Department. Imports fell slightly, just 0.3 percent, while motor vehicles purchases from foreign countries fell 2.8 percent. Imported industrial supplies fell 1.7 percent. According to Forexlive, US exports reached $127.1 billion and imports were $192.2 billion. Trade contributed to almost two-tenths of economic growth in the second quarter.

Is a devaluation the right step to reduce the trade deficit?

Many countries like to devalue their currency to fight against trade deficits. Imagine that a country devalues its currency by 25 percent, then, the products that it exports become more competitive. On the other hand, the products that this country imports become more expensive, thus, those imported goods lose market share in the local market. If a country exported 100 and imported 150, it means that it had a trade deficit equivalent to 50. After devaluation takes place the exports grow to 115 and the imports fall to 135, thus, the trade deficit falls from 50 to 20. Devaluation has advantages, but it also has disadvantages.

Disadvantages of a devaluation

Devaluation of a currency erodes national wealth, and it also destroys the trust that many people have in that currency. It's also negative when a country has large foreign debt. If there is a devaluation of 25 percent of the local currency, then, paying a debt in Euros or British Pounds will be much more difficult.

A country is able to improve its trade balance after devaluation, but paying foreign debt is more difficult. What steps should be taken to avoid devaluation?

Innovation is key

A country like the U.S. has to manufacture products that just a few countries produce. Trying to compete in the textile industry with Asian countries that have cheap labor costs is going to be very difficult.

America has to develop advanced technologies like electric vehicles, where competition is scarce. The U.S. has to train its workforce for the new challenges.

Exports of services have to be increased

The U.S. has a powerful manufacturing sector, but it also has a huge service economy. It must increase the exports of services to get more dollars and close the trade deficit. The U.S. is strong in franchises, financial services, insurance, and more. Today, the U.S. has become a post-industrial society, where most people work in the service sector, thus, there is great potential to sell more abroad.

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