Comment on May Trade Deficit Figures

The U.S. Census Bureau today released its latest figures on the U.S. trade deficit. The deficit declined slightly from $56.9 billion in April to $55.3 billion. This was largely a result of declining imports of goods. Goods imports fell from $136.9 billion in April to $135.3 billion in May. Included in this import reduction is a decline in petroleum imports to the tune of $0.4 billion as oil prices dropped to their lowest level in months in May.

The aggregate figures, though, mask important weaknesses. For instance, the bilateral trade balance with China has risen again in recent months, reaching its highest level since last November (figure 1). In May, the trade deficit with China accounted for 28.5 percent of the total U.S. trade deficit.

The trade deficit in advanced technology products also rose again. To reduce the U.S. trade imbalance, gains in areas where the U.S. has traditionally enjoyed a competitive advantage are crucial. However, since the middle of 2002, the trade balance in this category has consistently been negative. Over the past months, the trade deficit in advanced technology products has once again risen from a low of $1.5 billion in March 2005 to $3.9 billion in May 2005 – marking the largest deficit since November 2004.

Further, over the past years, the dollar has lost strength against the euro, the common currency for most of the European Union (EU). This should have helped to improve the bilateral trade balance between the EU and the U.S. Instead, the trade balance has actually worsened. In May 2005, the U.S. trade deficit with the EU once again broke through the $10 billion mark, reaching its highest level since November 2004.

In addition, recent developments pose new obstacles to reductions in the U.S. trade deficit. For one, the dollar has risen again. According to data by the Federal Reserve, the dollar reached its highest level since October 2004 at the start of July 2005. Since reaching its last low point in December 2004, the dollar has appreciated by 3.8 percent. The higher dollar value will ultimately make it harder for exporters to sell their products in overseas markets and will make it more attractive for importers to buy from foreign producers. Further, oil prices have seen a resurgence. According to the U.S. Energy Information Administration, oil prices have risen by well over 20 percent since reaching their last low in the middle of May 2005. As oil prices have increased, it is likely that oil imports will also increase. These two developments could lead to a future worsening of the U.S. trade deficit and require that close attention is paid to those areas where the U.S. should have a competitive advantage, but is losing it.

Christian E. Weller is a senior economist at the Center for American Progress.