US Trade Gap Narrows

The latest figures for the US trade deficit (the value of imports minus the value of exports) dropped for the first time in six months and gave analysts a pleasant surprise. May's trade gap was $46 billion, $2.3 billion lower than the experts thought. This could result in some upward revision in US growth estimates, but any enthusiasm beyond a single cheer is excessive.

A smaller trade deficit is good news, naturally, but a good result for May does little to change the overall picture. Last year's record trade deficit was $496.5 billion, and the pace set in the months before May suggest that record will fall. In the first five months of 2004, the US imported $231 billion more than it exported. In the same period of 2003, the trade deficit was $208.7 billion.

So what? The US has run a trade deficit for so long that the government doesn't even bother to put black ink in the printer when calculating the imbalance -- the figures seem printed in permanent red. And so long as foreign investors and trade partners are prepared to accept pictures of dead presidents in lieu of something they can use like food, energy or DVD players, there is no problem.

But the dollar is weak, which explains the good export figures in the equation. People who do their accounting in other currencies took a hit (many of them did at least) because their dollar-denominated assets lost part of their value as the dollar slid. Eventually, they will decide that there is a point beyond which holding dollars is a bad idea. Earning 5% in US assets when the dollar loses 6% against one's home currency is a recipe for poverty. When that level is hit, the dollar will slide farther because dollar-denominated assets will flood the market.

So, to prevent doomsday, the US needs to keep the trade deficit under some kind of control. If oil prices drop to $30 a barrel, it is conceivable that the deficit will continue to improve without changing anything else. At the same time, a reduction in imports will also come naturally as the economies of Europe and Asia enter the boom phase of the business cycle. As demand in those economies increases, US export opportunities will rise as well. Things are looking up, but it is a bit soon for champagne.


© Copyright 2004 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.


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