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February 17, 2007
Trade deficit "good news"?
The New York Times is reporting the following “good news.”
Trade Deficit Peaks and Declines, but It Remains Huge - New York Times:
After years of deterioration, the United States trade deficit appears to have finally peaked and started to decline.
To be sure, the government reported this week that for all of 2006 the trade deficit in goods rose 7 percent, to a record $818 billion. But as a percentage of gross domestic product, the figure was virtually unchanged at 6.2 percent.
A sign of improvement is that exports of United States goods were up 14.5 percent in 2006, while imports rose 10.9 percent. It was the first time since 1997 that exports rose more rapidly than imports, and it was the biggest rise in exports since 1988.
However, if you look closely at the charts there is little to be optimistic about. Many have latched on to the fact that petroleum is a large part of the deficit. But as the chart shows, 2/3 of the deficit is non-petroleum. So even if we were completely in balance on oil, we would still be running about a $45 to $50 billion deficit every month -- roughly 4% of GDP. Likewise China. If we had a balance with China, our goods trade deficit would still be $600 billion.
Trade theorists tell us it is wrong to focus on any one bilateral deficit - such as US-China. The way multilateral trade works, we are told, is a deficit with one country can be made up with a surplus in our trade with another. But, there is no region of the world with whom we are running a surplus -- and very few countries.
Likewise, we are told that currency changes work. But look at our trade with the Euro zone (after a decline in the dollar versus the euro -- see Trade Deficit Stubbornly Defies the Dollar’s Slide - New York Times). With that decline, our deficit has stabilized at $91 billion. We had to have a major decline in the dollar just to stop the acceleration of the deficit. How much further does it have to decline in order to get back to balance?
Nor will our intangibles and services trade help very much. Our services trade surplus is about a tenth of the total deficit (even though services make up about a quarter of our exports).
I would like to remain optimistic about our international economic position. Any improvement in the deficit is good - and any sign of hope should be celebrated. But we also need to be realistic. These are marginal changes at best.
There are massive structural shifts going on that we are still trying to understand. As a consequence, we are altering our perceptions of the world to fit the disconcerting facts. The old theory of self-correcting markets through exchange rates has given way to the new theory that deficits are sustainable. Thus, the debate is between those who think the problem will go away versus those who say we just need to fix the exchange rate problem, especially with China. Neither of these theories is helpful. We need a new theory of international economics in the I-Cubed Economy.
Anyone out there have any ideas?
Posted by Ken Jarboe at February 17, 2007 9:39 AM
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