U.S. Foreign Trade Deficit Contributes Good News on the Economy
Alex Carrick
U.S. Foreign Trade Deficit levels out at $700 Billion
After all the negative talk about turmoil in financial markets and the likelihood of recession in the first half of this year, the search is now on for good news about the U.S. economy. There is some encouragement to be taken from the latest trade statistics. The trade deficit in goods and services has dropped back to about $700 billion annualized, after topping out at more than $800 billion several times between mid-2005 and mid-2006. Moreover, the trade deficit has been about $700 billion from October 2006 to the latest month, January 2008.
Improvement in One “Services” Area and Two “Goods” Areas
As a result of the lower-valued greenback, the U.S. has made significant improvements in one “services” area and two “goods” areas. With respect to the former, the gain has been in the travel account. It is a bit of a brain teaser, but funds spent by Americans traveling outside the country are considered to be imports. Funds spent by foreigners traveling in the United States are exports. Therefore, the influx of visitors taking advantage of the bargain U.S. exchange rate is quite positive for the balance of trade.
As for trade in goods, one major improvement has come in machinery and equipment sales to other parts of the world that are still expanding at a more rapid pace. A second gain has been made in resource areas such as agricultural products (e.g. corn) and mining products. Shipments of both grains and metals have been helped by high international demand and resulting high commodity prices.
Other Good News for the Trade Balance
There are some other factors that may also help the trade balance going forward. The value of the Chinese Yuan is accelerating faster versus the U.S. dollar this year than last year (see related story). This will slow Chinese consumer-goods exports to the U.S. and apply some brakes to the Chinese economy. With respect to the former, it is not yet clear whether this will simply mean a switch to buying low-cost items from other developing nations. With respect to the latter, slower growth in China will take some of the upward pressure off commodity prices.
The U.S. has two huge foreign trade problems – its deficit with China and its deficit in energy products, particularly crude oil. The lower U.S. dollar has been creating a trade anomaly on the oil front. As the dollar has fallen, crude oil prices have risen. This has partly resulted from action by producers to protect their real (currency-adjusted) returns. As a result of this effect, the falling U.S. dollar has created an ever higher current-dollar trade deficit in oil. Note from the accompanying table that the percentage of the U.S. trade deficit with different geographic regions has risen significantly (versus a year ago) only with OPEC nations. This situation will begin to be rectified if the U.S. dollar stabilizes and oil prices ease.
