US Trade Deficit Shrinks

In Econ 101, the instructor will explain a trade deficit by saying it exists when a nation exports less in value than it imports and move on to other things. However, there is a great deal that hinges on a country’s balance (or imbalance) of trade. So, it is good news that the US trade deficit for November shrank from its October level by 5.8%. The not-so-good news is that October’s was a record high deficit, while the dollar strengthened on the good news.

Because it takes a while to add up all the figures, the November 2005 numbers are the most recent and were just released by the Commerce Department. The US trade deficit was $64.2 billion for that month, down from October’s $68.1 billion, which the department revised from an initial $68.9 billion. Wall Street expected a deficit figure of $66.25 billion or so according to Reuters, and as a result, the dollar rose when the news came out.

A rising dollar, however, is the last thing the US needs at this stage. If it costs foreigners more of their local currency to buy dollars, US goods will get more expensive for them to purchase (although the dollar price doesn’t change), and they will stop buying. Since what they buy is, by definition, US exports, this will make the trade deficit get bigger.

“So what?” has been the response from a great many American analysts. As Herb Stein, economic advisor to Richard Nixon and father to Ben Stein (actor, and really smart guy), said “When something can’t go on forever, it won’t.” For now, people outside the US are essentially lending the US money; that’s how the trade equation balances. The deficit is countered by loaned funds, usually US government and corporate debt. When the people outside the US decide they have enough US debt in their portfolio, they will stop buying that debt. When demand for debt drops, interest rates must rise to keep things attractive to them. Higher interest rates will slow the US economy, which at the moment doesn’t need any slowing.

By most estimates, the US dollar needs to decline by about 30% against its main trading partners’ currencies to achieve balanced trade. This figure is largely pulled out of thin air because of all the variables around it, but it is as good a number as the world has. Until the dollar weakens, the trade deficit will persist, and weaken America’s future economy. An America that was energy self-sufficient would have no trade deficit – something to consider when looking at SUVs at the local Toyota dealership.


© Copyright 2006 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent.
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