March 10, 2004

Trade Deficit

The Associated Press paints a bleak picture for trade in January: Record Trade Deficit in January Fuels Political Fight:

America's trade deficit hit a record monthly high in January, the start of an election year in which Democrats hope to use the swollen trade gap and the loss of U.S. jobs as campaign issues against President Bush.

The Commerce Department reported Wednesday that the trade imbalance mushroomed to $43.1 billion in the first month of 2004, representing a 0.9 percent increase from the previous month.

For all of 2003, the trade deficit posted an annual all-time high of $489.9 billion, according to revised figures.

So the rise in the trade deficit was $365 million and Democrats are going to paint this as a clear indication that Bush's trade policies don't work.

But reading to the end, and perusing the actual report [PDF] we see that exports of meat and poultry fell by $255 million in January due to mad cow disease. In addition, oil & gas imports jumped $768 million dollars (6.9%) in January, mostly due to a $2.08 (6.5%) increase in the price of oil from December.

So the "jump" doesn't look particularly terrifying, especially since the 3 month moving average for the trade balance is actually lower than it was in April and May of 2003.

Alan Greenspan is right – the weakening dollar will mostly fix this problem over time, as US exports get cheaper and foreign imports more expensive. This is already working, as imports from Western Europe fell $5.4 billion (41%) in January. The country with the largest imbalance was China, with whom our deficit grew $1.6 billion (16.2%). Since they peg the yuan to the dollar, we're not getting any benefit from the cheaper dollar and they seem to be taking up some of the slack from the EU. It remains to be seen how this will play out over the next 8 months as trade with China will be a big campaign issue. My theory? China will make concessions on the yuan, both to appease their US trading partners and to slow their 9.1% growth rate (which they've already hinted may be too fast to handle).

A bigger problem for us will be continued high oil prices, which could slow the recovery. OPEC doesn't seem to like Bush very much so we could be in store for continued high prices for a while. On the other hand, the Gulf States are so addicted to oil revenue that they'll have to raise production some time – i.e. it's likely they couldn't survive a prolonged shortage like in the 70's.

Anyway that's my take. Another prediction: it's going to be increasingly hard to sort these things out give all the rhetoric that will be sure to fly from both camps over the next 8 months. That's a bit scary since it would seem that "sure and steady" (rather than "frantic and reactionary") is the right policy in the near term in order to protect the fragile recovery.

Why am I worried about reactionary policies? We end with the following quote from US trade representative Robert Zoelleck before the Senate Finance Committee (via Drezner):

“With America’s high standard of living, we cannot successfully compete against foreign producers because of lower foreign wages and a lower cost of production.” Perhaps this pessimism sounds familiar. It could very well have come from one of today’s opponents of trade, arguing against a modern-day free trade agreement. But in fact these words were written by President Herbert Hoover in 1929, as he successfully urged Congress to pass the disastrous Smoot-Hawley Tariff Act that raised trade barriers, destroyed jobs, and deepened the Great Depression.

Posted by richard at March 10, 2004 07:51 PM