Dealing with the Trade Deficit

By Jonathan Jacoby, Amanda Logan | May 10, 2007

Congressional moves this week to boost fuel efficiency in our automobiles and pressure the Bush administration to press China to boost the value of its currency could not be more timely given the latest trade deficit figures released today by the Census Bureau.

The new figures show that U.S. imports from China exceeded U.S. exports to China by $57.0 billion in the first three months of 2007, almost $10 billion more than the $47.3 billion trade deficit with China in the first quarter of 2006. After registering a record bilateral trade deficit with China of $232.5 billion in 2006, the gap is possibly on track to set another record this year.

Despite digging a deeper trade hole with China, the overall U.S. trade deficit actually dropped to $180.7 billion in the first quarter of 2007, compared with $191.6 billion the first quarter of last year. Yet one of the most notable things about March’s numbers is the unprecedented jump in the trade deficit from the previous month’s numbers. Analysts had predicted a $60 billion deficit for March 2007, but the Census Bureau reported a $63.9 billion deficit for the month—a 10.4 percent increase from February.

This jump is due in large part to a jump in U.S. imports of petroleum. The U.S. spent $22.1 billion more on petroleum imports than petroleum exports in March 2007—an almost 19 percent increase from the $18.5 billion in February 2007.  Factor out the economy’s continued dependence upon foreign sources of oil and the trade deficit numbers released today would have come in 34.5 percent lower.

Congress is keenly aware of the trade problems associated with foreign oil imports and our nation’s trade imbalance with China. The Senate Commerce Committee on Tuesday approved a bill requiring new cars and trucks to average 35 miles per gallon by 2020—a key step in cutting foreign oil imports. And yesterday three committees in the House of Representatives held a joint hearing to focus on Chinese (and to a lesser extent, Japanese) currency manipulation. Congressional leaders are expected to ratchet up the pressure for legislation to address China’s undervalued currency—which boosts the country’s exports and damages a number of U.S. industries—as Treasury Secretary Henry Paulson prepares to hold the next installment of the U.S.-China Strategic Economic Dialogue in Washington in two weeks.

Still, the year-over-year decline in first quarter trade deficit, while quite modest, is an encouraging development. American exports have grown steadily; in fact, they grew faster than imports last year (12.8 percent versus 10.5 percent) for the first time since 1997. The current U.S. economic slowdown explains part of the import side of this phenomenon, since there is somewhat lower demand for imports, while accelerated growth overseas explains part of the export story.

Despite slower growth in the U.S., the global economy is growing faster than at any point in the last quarter-century, thereby generating greater overseas demand for U.S. exports, especially services. The U.S. had a services trading surplus of $18.8 billion in the first quarter of 2007—an improvement of 13.3 percent over the first quarter of 2006. While there is much focus on the robust expansion of the Chinese and Indian economies, the International Monetary Fund projects that developed-world trading partners such as the European Union and Japan will grow faster than the United States this year.

U.S. export growth is also due to the falling dollar, which recently hit a 10-year low against all trading partner countries on an inflation adjusted basis. Demand for dollars has declined as central banks and foreign investors look to diversify their portfolios by investing in other currencies.

The trade deficit, however, is still at very high levels. One of the main culprits: our nation’s addiction to imported oil. The U.S. spent $62.3 billion more on petroleum imports than petroleum exports in the first quarter—a significant portion of the overall trade imbalance.

Even if exports were to outstrip imports in absolute terms, not just in terms of growth rates, it would take many more years of sustained export growth to reduce the U.S. trade deficit significantly. Congress is taking the right steps, but the Bush administration should take immediate and thorough action to accelerate China’s move toward a reasonable exchange rate. The president must also show much more leadership in reducing the country’s insatiable appetite for oil. Moreover, we should reduce our government’s fiscal deficit, which would lessen the need to borrow funds overseas and thus weaken demand for dollars. These would be strong first steps, which together with an overall strategy to improve U.S. competitiveness in world markets, could help to reduce the American trade deficit on a sustainable basis.

Jonathan Jacoby is Associate Director for International Economic Policy at the Center for American Progress. Amanda Logan is the Special Assistant for Economic Policy at the Center for American Progress.

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