Trade Gap

Our appetite for foreign made goods is only one factor.

Wilmington NC – [Click the Listen button to hear Dennis' commentary.]

America?s foreign trade gap has been called unsustainable yet unstoppable. This seems to be more truth than fiction.

The trade deficit indicates how much US imports exceeds exports. In essence, when trade is in deficit, the country is spending more to buy foreign products than it earns from selling American products abroad. It also is an indicator of how many American dollars are being accumulated by foreigners.

Another way of looking at the deficit is, the number of foreigners working to supply things to America is greater than the number of Americans working to supply foreigners. This creates a drag on our economy. Both employment and income are less than they would otherwise be.

In the normal course of events, the US will have a trade deficit with some countries. Some have much of what Americans want to buy ? crude oil, for example. But it will also have a surplus with other countries ? those who want more of what Americans produce than they make themselves. Movies, computer software, and soybeans come to mind. Over the long haul, the value of all imports will roughly equal the value of all exports.

Recently, however, this has not been the case. The trade gap grew steadily throughout 2002, peaking around 138 billion dollars early last year. Part of the reason was that, many of America?s big customers ? Japan and Euro-zone countries, in particular ? had slumping economies and their consumer spending was not keeping pace. At the same time, American?s appetite for foreign goods seemed insatiable.

During the last three quarters of 2003, the trade deficit narrowed, falling to about 127 billion dollars at year?s end. A major factor was, the weakening dollar. On a trade-weighted basis, the dollar fell about 10 percent during the last half of last year. A weaker dollar makes US exports cheaper and imports more expensive. This, then, moves us toward more balanced trade.

Despite continued weakness in the dollar ? as anyone who has traveled abroad this year knows only too well ? the trade deficit has again turned upward. This year?s first quarter deficit reached 145 billion dollars, and then rose to a one-month high in April before easing marginally.

Why hasn?t the weak dollar had a more pronounced and lasting effect? Part of it is that, the US is a huge market for many foreign countries. They work hard to hold on to the American market. Some countries ? China and Malaysia, for example ? fix their currencies to the dollar. Thus, despite a weaker dollar overall, the US gains no advantage. Japan cut its interest rate to zero to lower the value of the yen. Some countries try various subsidies to keep their prices in the US relatively low.

The US argues that other countries should boost their economic growth and thus expand their demand for American goods. By contrast, many foreigners argue that the US needs to rein-in its over-spending ? specifically the federal budget deficit ? to scale back American demand for goods and services and thus, help restore trade balance.

At politically-feasible levels, however, neither approach is likely to be hugely successful. Increased foreign economic growth will primarily boost demand for foreign, not American products. And, even if the Federal budget deficit was to be cut sharply, Americans may well pick up debt and spend more individually.

The short of it is, as long as foreigners are willing to accumulate American dollars, the trade deficit will persist. If they stop, the trade balance will quickly change. And, American?s infatuation with foreign goods will surely be tested. But when this may happen is beyond the divination of this commentator.