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Peter Morici breaks down the major elements of the U.S. trade deficit, with a causal analysis illuminating solutions.
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The Falling Dollar and the Stubborn U.S. Trade Deficit
by Peter Morici
Since October 2006, the euro has risen about 13 percent against the
dollar but don’t expect dramatic improvements in the U.S. trade deficit
until China and other Asian exporters permit their currencies to rise
significantly too. (read more).
Large U.S. trade deficits and excessive foreign borrowing are
driving down the dollar against the euro, the British pound and several
other currencies. American and European businesses compete intensely in
global markets, and a cheaper dollar advantages U.S. exporters.
Since October 2006, U.S. monthly exports have jumped $14 billion. Yet,
the U.S. trade deficit, though fluctuating month to month, remains
about $58 billion, because oil prices are rising, and the Peoples Bank
of China and other Asian central banks have stepped up purchases of
dollars and other foreign securities to keep their currencies cheap.
Oil, Chinese consumer goods, and automobiles account for about 98 percent of the U.S, trade deficit.
Net imports of petroleum are about $24 billion, up from $5.5 billion in
December 2001. Retuning conventional gasoline engines, hybrids, nuclear
power, and alternative energy sources could substantially reduce oil
consumption. These solutions require national leadership, but both
Republican and Democratic Party leaders have failed to champion
comprehensive policies to accomplish what is possible.
Meanwhile, a falling dollar drives up the oil import bill, because
petroleum is priced in dollars and a cheaper dollar permits foreign
consumers, who earn their incomes in other currencies, to aggressively
bid up the price. No surprise, oil seems headed for $100 a barrel.
The bilateral trade deficit with China is about $23 billion, up from
$5.5 billion in December 2001, in large measure because China keeps the
yuan cheap. That makes Chinese products in U.S. stores artificially
inexpensive, and U.S. exports to China too costly.
China revalued the yuan from 8.28 to 8.11 in July 2005, and has since
permitted the yuan to rise 3.4 percent every twelve months.
Modernization raises the true underlying value of the yuan more than 5
percent a year, and it remains 40 to 50 percent undervalued.
Automotive products contribute $10.1 billion to the monthly deficit.
Mexico and Canada account for $3.6 billion, reflecting the cross-border
supply chains of the Detroit automakers. Those production decisions
change only slowly. For example, GM has announced its exports will not
be much altered by the decline in the dollar.
German automakers account for $1.7 billion of the trade deficit, but
U.S. imports of their products are mostly higher-priced models within
their vehicle classes. Total sales will not greatly respond to price
changes driven by exchange rate movements.
Korean and Japanese automotive products account for $4.7 billion of the
deficit, and a large share face fierce price competition. Having
successful assembly facilities in the United States, Asian
manufacturers could move more production here, but the won has risen
only about 4 percent against the dollar, and the yen has gained much
less.
The central banks of Japan and Korea have aggressively stepped up sales
of yen and won for U.S. dollars and other securities to keep their
currencies cheap against the dollar. This discourages Toyota, Hyundai
and others from moving more auto assembly and sourcing to the United
States.
The International Monetary Fund publishes Central Bank holdings of
dollars and other securities, providing an accurate picture of currency
market intervention. China and several other countries have increased
intervention to keep their currencies cheap against the dollar. This
forces the U.S. dollar lower against the euro, British pound and
Canadian dollar, which generally float without central bank
intervention.
Annual Currency Market Intervention
(Billions, U.S. Dollars)
2005 2006 2007*
China 207.0 247.0 489.5
Japan 0.4 45.4 63.5
Korea 11.3 28.6 24.5
India 6.3 38.8 92.9
Brazil 0.8 32.0 102.8
Russia 55.1 119.7 159.6
*estimated through September (latest data)
In 2007, these central banks’ purchases of predominantly U.S.
dollar-denominated securities will exceed $900 billion and the U.S.
trade deficit.
It is fashionable to tag the U.S. federal budget deficit for these
purchases, but this deficit is on track to be only $200 billion in
2007. Currency manipulation is not about funding U.S. federal spending,
it is about boosting exports to the United States.
The fall in the dollar against the euro gave U.S. exports a boost,
showing exchange adjustments can have their intended effects on the
trade deficit. However, until the United States does something about
its appetite for oil and China and other mercantilist states stop
manipulating their currencies, the United States will continue to have
large trade deficits.
Peter Morici is a professor at the University of Maryland School of
Business and former Chief Economist at the U.S. International Trade
Commission.
Peter Morici
Professor
Robert H. Smith School of Business
University of Maryland
College Park, MD 20742-1815
703 549 4338
Cell 703 618 4338
This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
http://www.smith.umd.edu/lbpp/faculty/morici.html
http://www.smith.umd.edu/faculty/pmorici/cv_pmorici.htm
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