U.S. Trade Imbalance Widens Slightly: So What?
The U.S. trade gap widened slightly in March -- the first time since July -- and now stands at $27.6 billion, the Commerce Department said yesterday.
The global recession is to blame, some say. Other countries are buying fewer American products, and Americans, now saving more than spending, are buying fewer foreign products.
The Ticker never knows quite what to make of the trade gap, frankly, other than that we prefer to call it a trade "gap" or "imbalance" rather than a "deficit."
First off, calling it a trade "deficit" is hegemonic. The very phrasing implies that trade is something America should be "winning" with a "surplus." It's also a concept that is outdated in the global economy and ignores the might of trading partners such as China.
To wit: Trade with China accounted for more than half of the March gap -- $15.6 billion.
When was the last time the U.S. had a trade surplus? That would have been the prehistoric-trade year of 1975, which tells you pretty much all you need to know about how dated the concept of a trade surplus is.
Also, if you recall, the mid-'70s were terrible years for as U.S. economy, which was beset by "stagflation:" the crippling combination of stagnant economic growth, inflation and high unemployment. So: zero correlation between trade surpluses and good times in the modern era.
But does a trade gap or surplus mean anything to the U.S. economy or tell you anything about its health?
On the one hand, if the U.S. is on the short end of the gap, it means Americans are buying more than they're selling to other countries. Consumption is usually good for the U.S. economy.
On the other hand, it also means that the U.S. is producing less of what the rest of the world wants to buy. So, for instance, that means that Koreans and Germans are now buying their dishwashers from China instead of the U.S., bypassing our economy altogether. That would be bad.
We asked two economists about yesterday's reported increase in the trade gap and the larger issue, as well.
"Month-to-month fluctuations in the number certainly don't mean much, but if you had to read between the lines, I'd say the figures suggest a slight shift in the balance of the worldwide recession from U.S. weakness (lower U.S. imports) to worldwide weakness (lower U.S. exports)," Prof. Douglas Irwin, professor of economics at Dartmouth College, wrote in an e-mail.
Benn Steil, director of international economics at the Council on Foreign Relations, said not to worry about the trade gap -- as long as the rest of the world keeps demanding U.S. dollars.
Because dollars are the currency of international trade, other nations nee them. We print them, exchange them for goods from, say, China, and get them right back in the form of low-interest loans from China, Steil said.
"We're getting a pretty good deal on this," he said.
Steil points out that expanding global trade changes the way we think about trade gaps. Back in the mid-1980s, for instance, the U.S. trade gap hit 2.8 percent of GDP -- a figure many economists said was unsustainable.
By the height of the housing/credit boom in the early part of this century, however, that number had risen to 7 percent of GDP.
Though Steil says a healthier number for the U.S. economy would be lower than 7 percent, he points out that the only way the U.S. could return to a trade surplus would be if the rest of the world stops wanting dollars -- which would be disastrous for the U.S.
"We would be like a developing country," Steil said.
Fortunately for the U.S., the rest of the world -- especially China -- still wants dollars. But that may not last.
Since integrating with the world economy in the 1990s, China has not only traded in dollars, it has built up its wealth in dollars. The Chinese are concerned that their reserves will be destroyed if "we continue on this course of printing and borrowing money," Steil said. Essentially, devaluing the dollar.
Hence what Steil called the "startling" statement in March by Zhou Xiaochuan, the governor of China's central bank, calling for a new reserve currency to replace the dollar.
China and the U.S., of course, have been jousting over currencies, with some in the U.S. accusing China of unfairly manipulating its yuan to keep prices of U.S. goods high. Zhou's statement might be more saber-rattling.
Or it might not be.
Which speaks to Steil's point: When it comes to the U.S. trade gap, how many refrigerators the U.S. sells overseas is far less important than how many dollars the rest of the world wants.
May 13, 2009; 8:00 AM ET
Categories: The Ticker | Tags: Commerce Department, dollar, trade deficit, yuan
Save & Share: Previous: Insider Stock Sale Crashes GM Stock
Next: Markets Dive at Opening
Posted by: mirebay | May 13, 2009 9:37 AM | Report abuse
Posted by: Ulmerswede | May 13, 2009 9:54 AM | Report abuse
Posted by: Ulmerswede | May 13, 2009 10:11 AM | Report abuse
Posted by: captjason80 | May 17, 2009 1:48 AM | Report abuse
The comments to this entry are closed.