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Market Solutions |
15 March 2004
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US Trade Deficit Record Caused by Dollar
America's trade deficit hit a record $43.1 billion in January up from a revised $42.7 billion in December. The January result is $200 million higher than the previous record set in March 2003. Imports dropped by $700 million, and exports slid $1.1 billion. However, the unseen picture is the effect the role of the dollar has in the world economy.
There was a one-off factor in the uptick. Exports of meat and poultry, which stemmed from the mad cow and bird flu scares, pushed meat exports lower by $379 million. All things being equal, that would have accounted for the increase in the trade deficit, but in economics, all things are never equal.
America's trade gap with China soared to $11.5 billion in January from $9.9 billion in December. The Chinese yuan is pegged to the dollar, meaning that the US unit's drop on world markets does not effect the trade between the two nations. The trade gap with Japan shrank to $5.3 billion in January from $5.7 billion in December, and against the eurozone, the fall was from $10.3 billion in December to $5.9 billion in January. The floating dollar/yen and dollar/euro play no small part in this.
At the same time, the persistence of high and climbing oil prices also affect the US because of the role of the dollar, indeed are caused in part by it. OPEC produces oil for the entire world and prices it in dollars. Fuel oil and crude oil put $639 million on to the trade deficit in January. Much of the increase stems from the fact that when the dollar drops, oil become more expensive to Americans as producers increase the dollar price to maintain their margins in their local currency. Price in euros, oil hasn't risen all that much.
Would America be better off if the Chinese floated the yuan? That is a tough call because so many American jobs rely to some extent on imports from China; more costly Chinese goods may adversely affect employment in the US in the short run while substitute goods and services are sought. Would America be better off if OPEC priced petroleum against a basket of currencies? Again, a difficult question because America's share of the basket would have to reflect its huge oil consumption, and such pricing may actually exaggerate currency swings.
Would America be better off exporting more and importing less? In the long run, most assuredly, but it is best if the currency markets are allowed to make the adjustment organically. Trade wars just make everyone poorer. At the same time, a little friendly persuasion in Beijing wouldn't go amiss, and a 3 mile-per-gallon increase in SUV mileage requirements is a guaranteed winner. Ideology, forcing the world into one's own view of it, should never be confused with sound policy, which is getting the job done by any means necessary.
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