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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 It's also a concept that is outdated in the global economy and ignores the might of trading partners such as China.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.

-- Frank Ahrens
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By Frank Ahrens  |  May 13, 2009; 8:00 AM ET
Categories:  The Ticker  | Tags: Commerce Department, dollar, trade deficit, yuan  
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Ah, but you miss the point that the overseas demand for dollars is based on maintaining or increasing the dollar's value. So what is the value of the dollar based on? Obviously, the value of the U.S economy.

If we don't generate enough wealth by producing products and services that equal or exceed what we consume then we are spending our generational savings to make up the gap. This exporting of wealth undermines our top dog position which creates the concern in international financial markets.

China comments about changing the role of the dollar is, in affect, telling us to stop overspending or in the alternative find something to generate more wealth at home to sustain the value of the dollar.

Posted by: mirebay | May 13, 2009 9:37 AM | Report abuse

This may be the dumbest article ever. Germany has had a trade surplus for years, does that mean no one wants Euros and that they are effectively a third world country? One of the sources said a trade surplus would mean nobody wants dollars indicating the US had become a third world nation, once again, much like Germany.

Everything you need to know about the years of ignorance that has brought the US to its current poison (dragging the rest of the world economy down with it) is pretty much summed up here, has the author and the referenced academics been living under a rock? Getting further and further indebted to China and other nations is described here a “good deal”!

The idea of consuming money you don’t make - only trusting the constant increase in asset values - mostly homes - was dumb even before the current crisis sent those asset’s values plummeting. Since the US household savings ratio has been almost zero for years (much lower than most of Europe and Japan), a significant percentage of US households are now under water in net assets! So what will they now consume against when they can’t borrow against assets? How will this situation turn around to bring spending up to the previous levels in a hurry?

That is what this article wholly ignores. It is not rocket science - the consumption was done largely by borrowing against blown up asset values that have now deflated. If anything, the current situation should illustrate even to the most financially illiterate just how dangerous the idea that trade deficits do not matter is. The dollar is saved in a crisis by its status as reserve currency, the author appears to have missed more and more people are now questioning that status as the only way out of this appears to be money printing, and it will happen at some stage meaning Americans lose even more of their wealth. Living on loans will do that - hence trade deficits certainly matter and are under most conditions only sustainable at rather low average levels if you want the nation to get richer.

Forgetting about this and instead trusting and exploding and all devouring financial industry (sucking up both skilled people and resources) and growth in asset values and, well - Island, the UK and the US are good examples of where that will take you.

Posted by: Ulmerswede | May 13, 2009 9:54 AM | Report abuse

Bingo mirebay! How this can be overlooked in an article of this kind is amazing, two years ago, fine - but now?

Posted by: Ulmerswede | May 13, 2009 10:11 AM | Report abuse

It seems that the USA is now the opium addicts that China was 150 years ago. As shows, the US' trade deficit with China is large, and Americans are consuming more cheap junk just like the Chinese were 150 years ago from the british east india company. It's the US' turn to be addicted to cheap junk.

Posted by: captjason80 | May 17, 2009 1:48 AM | Report abuse

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