Comment on October Trade Data

The Census Bureau today released its latest estimates for international trade. After a sharp rise in the U.S. trade deficit in September, the trade deficit has unexpectedly widened again in October to another record breaking $68.9 billion. In inflation-adjusted 2000 dollars, the goods trade deficit also rose by 3.0 percent, after an 8.9 percent jump in September. For 2005, the U.S. is on a path to set another record trade deficit. The cumulative trade deficit for the first ten months of 2005 was already 18.7 percent higher than for the same period in 2004. To begin making inroads into reducing the trade deficits, U.S. producers will have to sell more exports overseas. Yet, it is precisely in the export arena that problems appear to be emerging for the U.S.

Underlying this rise in the trade deficit is the fact that imports grew faster than exports not only in absolute terms, but also in relative terms. Imports expanded by a total of $4.6 billion, whereas exports rose by merely $1.7 billion in October. In relative terms, this is an expansion of 2.7 percent in imports and 1.6 percent in exports.

To shrink the U.S. trade deficit, exports of goods will ultimately have to grow faster than they currently do. For one, the U.S. cannot count on weakening import demand. Strong consumer demand and investment activities in the U.S. appear to translate directly into higher imports in the U.S. After all, the largest expansion of imports in October came in industrial supplies and materials, which grew by a total of $3.5 billion, or more than three quarters of the additional imports in October. This particular widening in imports occurred at a time when business investment appeared to continue on a solid pace and manufacturing activities seemed to strengthen. The service sector does not seem to explain this widening deficit either. In October, the trade surplus in services, such as tourism and financial activities, shrank by 6.2 percent to its lowest level in four months.

To reduce the trade deficit, U.S. producers will have to find more overseas buyers for their manufactured products. Yet, that seems to be exactly one of the problem areas for U.S. trade. In inflation-adjusted terms, goods exports over the past three months declined slightly, by 0.1 percent, from the previous three months.

One obstacle to greater exports appears to be the resurgent U.S. dollar. For instance, the dollar has gained against the euro since March 2005. According to the Federal Reserve, the dollar had lost 12.2 percent of its value against the euro by December 9, compared to March 11, its last high point. This makes exports to Europe more expensive and imports from Europe cheaper. The trade deficit with Europe widened by $2 billion, accounting for 69.0 percent of the entire trade deficit increase in October.

As the U.S. trade deficit continues to reach new record highs while American industries appear to be strengthening, it is crucial to find more ways for U.S. producers to export their goods to the rest of the world. The alternative will be a prolonged slow down in U.S. economic growth in the long run.

Christian E. Weller is Senior Economist at the Center for American Progress.