U.S. Trade: the Good and the Bad

May 15, 2008

The U.S. trade deficit was only 0.1% wider in 1Q08 than in 1Q07. As a percentage of nominal GDP, the shortfall was 5.0%, down from 5.3% in 1Q07. In order to stabilize the dollar size of the deficit, it was necessary for exports (+15.5% y/y) to advance twice as fast as imports (+7.9%). That would not have happened had the dollar not depreciated. By historical norms, the deficit’s relative size remains unsustainably high, suggesting that in time, say 2-3 years, the dollar will drop additionally either by design or force of market circumstances. Another impediment to further improvement in the trade gap is an acceleration in import price inflation, and the story there is not just energy. Non-fuel import prices recorded back-to-back increases of 1.0% in March and April, lifting the 12-month rate of rise to 5.8% from 3.3% as recently as January.

There was nice symmetry to the distribution of the U.S. trade deficit in 1Q08. The Western Hemisphere, OPEC, and Japan/Europe combined accounted for similar shares of the deficit: respectively 22.4%, 23.2%, and 22.8% of it. China’s 29.6% was somewhat bigger but not gigantically so, and it accounted for most of the remaining shortfall. Japan (11.3%) and Europe (11.5%) had comparable portions of the deficit. The balanced distribution of the deficit argues against blaming the policies of a foreign government, rather than persistently much greater U.S. domestic investment than savings, for the chronic nature of the U.S. external imbalance.



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