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International Picture, February 15, 2008

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February 15, 2008

U.S. trade balance improves for first time since 2001

by Robert E. Scott with research assistance from Lauren Marra

The U.S. Department of Commerce reported yesterday that the goods and services trade deficit fell to $711.6 billion or 5.1% of GDP in 2007, a decline of $46.9 billion since 2006. The trade deficit dropped by an unexpectedly large $4.4 billion in December due to a sharp drop in imports of autos and vehicle parts and consumer goods. The sharp drop in imports in December provides further evidence of a U.S. slowdown in the fourth quarter. Today’s report also indicated:

* The U.S. merchandise trade deficit, which includes only manufactured goods and commodities, declined $22.7 billion (or 2.7%) to $815.6 billion in 2007, while the services surplus increased to $104.0 billion, a $24.2 billion improvement (30.4%).

* The U.S. trade deficit with China rose $23.7 billion (or 10.2%) to $256.3 billion, offsetting improvements in the trade deficit with other countries such as Canada, Germany, the U.K. and other EU countries, Taiwan, Brazil, and Chile.

* The cost of U.S. petroleum imports also increased $27.9 billion (9.6%) in 2007; a small decrease (1.5%) in the volume of total energy related petroleum imports was more than offset by a $6.26 per barrel (10.8%) increase in the average unit cost of crude oil.

* The U.S. had a $53.5 billion global trade deficit in advanced technology products (ATP) in 2007, a $15.4 billion (40.6%) increase over 2006 levels. Trade with China can account for the entire U.S. ATP deficit in 2007 and most of the increase in the ATP deficit. The United States had a trade surplus in ATP products with the rest of the world of $14.2 billion in 2007. The United States had an ATP deficit with China of $67.7 billion in 2007, an increase of $12.6 billion over 2006.

While trade balances between the United States and many of its most important trading partners are improving, the trade deficit with China continues to grow, and the dollar value of oil imports continues to grow rapidly.

The U.S. goods and services trade deficit improved for the first time since 2001.
The deficit fell to $711.6 billion (see Figure A below), or 5.1% of GDP in 2007, a sharp drop of 0.6 percentage points over the deficit in 2006. The improvement in the deficit was explained, in part, by continued rapid growth of U.S. exports, which increased a record $176.1 billion (12.2%) in 2007, as shown in the Figure A. A slowdown in import growth to 5.9% ($129.2 billion) also played a key role. The slowdown in import growth in 2007 reflects softening in consumer spending in the overall economy. Both the import slowdown and export growth were probably driven in part by the depreciation of the dollar in recent years.

Figure A

The U.S. deficit in manufactured goods improved from $690 billion in 2006 to $679 billion in 2007, a decline of 1.6%. Manufactured imports are responsible for the bulk of the U.S. trade deficit. The manufacturing sector lost 3.3 million jobs between January 2001 and December 2007, including 200,000 jobs lost in 2007 alone. More than 32,000 U.S. manufacturing establishments closed between 1998 and 2005.

Trade deficits, manufacturing job losses, and plant closures are due, in large part, to overvaluation of the U.S. dollar. Much needed increases in the value of other currencies against the U.S. dollar since 2002 are largely responsible for the improvement in the U.S. trade balance in 2007. On a broad, inflation-adjusted, trade-weighted basis, a broad cross-section of currencies has gained 28% against the dollar since 2002, and 6.9% in 2007, as shown in Figure B. Most of that improvement has come against a group of major currencies, including the Euro and Canadian dollar, and the U.S. trade balance with those regions improved significantly in 2007. These currencies have gained 42.6% since 2002, and 7.9% in the past year alone.

Figure B

In contrast, the currencies of “Other Important Trading Partners (OITP),” a group that includes China and a number of other East Asian nations that tightly manage the value of their currencies against the dollar, have gained only 12.5% in value since 2002 and 5.8% last year. As a result, the U.S. trade deficit with these countries continued to grow in 2007. (See: A Plunging Dollar? How Far and Relative to What?). Sustained improvements in the U.S. trade deficits will be unlikely unless the managed currencies are allowed to appreciate substantially (e.g., 30% to 40%).

Improvement in the U.S. trade deficit in 2007 was due to the combined effects of appreciation of the Euro and other currencies over the past five years, and the initial effects of a U.S. slowdown. The U.S. trade deficit in 2007 still exceeded 5.1% of GDP, an amount considered unsustainable by most economists. The deficit could start growing again once the current slowdown ends, unless governments in China and other OITP countries agree to substantially raise the value of their currencies. This is a good time for other countries to re-orient their currency policies and spur consumption growth at home. These developments would be good for both the United States and its trading partners and would lead to a more stable global economy.

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