(Non-Oil) Trade Deficit Worsening Fast

It was not long ago that the United States was boasting of its improved trade deficit, but those days are gone and unlikely to make a comeback anytime soon. The whole issue of a trade deficit can be tricky to grasp, as a wide deficit between what one sells and buys may not be a bad thing, just as having a narrow deficit isn’t always necessarily good. The basic idea behind trade is that one buys from others what is too expensive to make at home and one sells what one is able to produce best. In reality, it doesn’t work this smoothly, but the basic premise is there—selling and buying are both important parts of the economic equation.

The latest data show that the deficit has grown considerably, and there is little mystery as to why. The dollar has been gaining in value for months while the euro, yen and pretty much every other global currency is weak against the dollar. That obviously makes selling outside the U.S. challenging and that imports are easier to sell in the U.S. The hike in the value of the dollar has also come at a time when the U.S. consumer is getting its act together and seems willing to spend, while the status of the global consumer is slipping further. The European demand for U.S. goods is low, and Asian demand is not much better. When interest rates rise again, the dollar will leap in value to the point it will be a major impediment to those in the export trade in the U.S.

All of this deficit activity is taking place apart from the oil sector and that is an unusual position for the U.S., historically. For decades, the most important part of the trade data was related to the price and demand for oil. The bulk of the U.S. imports were energy-related and as recently as 2006, the U.S. imported some 65% of the crude oil it needed. That percentage has crashed to less than 20% in most months and that has seriously limited the overall level of imports. The new driver for U.S. imports is the consumer and their insatiable demand for new goods.

The challenge for the U.S. is not on the import side as much as it is on the export side. The U.S. has to regain some of that footing despite the problem created by the strong dollar. To some extent, the U.S. companies have been able to hang on to some market share based on quality and service, but that will not offset high prices triggered by a strong dollar forever. The U.S. can’t do much about the popularity of the dollar these days, but there may have to be a more determined effort to support the exporter than has been the case in the past. The U.S. is not export-dependent in the same way that Australia and others have been, but it is a vital part.

- Chris Kuehl, NACM economist and co-founder of Armada Corporate Intelligence

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