The Census Bureau today released the trade data for January 2005. It revealed a deficit of $58.3 billion, the second largest on record. The high U.S. trade deficits are worrisome, since foreigners are indicating less willingness to finance them. Just this week, Japan’s Prime Minister Junichiro Koizumi sent financial markets into a frenzy when he said, “I think it’s necessary to have diversity,” meaning Japan should look to invest its money elsewhere. With this development, there is an increased risk that the dollar will decline too fast, thus disrupting economic growth in the U.S. through higher interest rates.
Despite the dollar’s decreased value, the U.S. continues to import more and more. The dollar started losing value on a broad basis in early 2002. Since then, it has declined by 15.0 percent. This should have made imports more expensive, and thus reduced them. Instead, imports have climbed steadily, reaching a record high of 15.7 percent of gross domestic product (GDP) by the end of 2004. In January, the trend continued, as the U.S. had the highest monthly imports on record with $159.1 billion.
Dollar and Imports, 2001 to 2004
To get out of this hole, the U.S. needs to rely on exports. Although exports have also climbed to a record high, reaching $100.8 billion, they are still far below the level of imports. Moreover, important trade areas remained weak in January. The U.S. had larger deficits in advanced technology products and a smaller surplus in services than in December 2004.
The U.S. continues to move further away from reducing its trade deficit to manageable levels. One obvious answer to help reduce the trade deficit would be a gradual decline in the dollar. This can be achieved by a return to fiscal responsibility and a reduction in the borrowing needs of the federal government. Unfortunately, judging by the president’s recent budget and his continued push for risky and costly Social Security privatization, neither of these solutions appears to be a real priority for the Bush administration.
Christian E. Weller is senior economist at the Center for American Progress.