International Picture, February 13, 2007
By Robert E. Scott
February 13, 2007

February 13, 2007

Soaring imports of steel, high-tech goods, and other products from China combined with sharply higher oil prices to drive trade deficit to new record

by Robert E. Scott with research assistance from Lauren Marra

The U.S. Department of Commerce today reported that the goods and services trade deficit reached a record level of $764 billion in the 2006, an increase of $47 billion (6.5%) since 2005. The trade deficit increased by an unexpectedly large $3 billion in December due to sharp increases in imports of industrial supplies, autos and parts, and capital goods. Notable facts from today's report include:

• The U.S. merchandise trade deficit, which includes only manufactured goods and commodities, was $836 billion in 2006, an increased of $53 billion (6.8%) while the services surplus increased to $72 billion, a $6 billion improvement (10.0%).
  
• Petroleum product imports, including crude oil, accounted for all the increase in the U.S. trade deficit.
  
• Rapid growth in the U.S. trade deficit with China, which rose to $233 billion (a 15% increase, or $31 billion), offset improvements in the trade deficit with other countries such as Canada, Germany, the United Kingdom and other European Union countries, Korea, Argentina, and Brazil.
  
• The U.S. absorbed very large increases in steel imports in 2006 (an increase of 12 million tons, or 40%). Falling import prices and rapidly growing foreign steel production capacity caused this import surge. Unit values of many basic steel commodities fell sharply, including hot rolled sheet (-6%), cold rolled sheet (-10%), wire rods (-85) and standard pipe (-5.8%), and the average unit value of all steel imports fell by 5%. 
  
• The United States had a $40 billion global trade deficit in advanced technology products (ATP) in 2006, a $4 billion improvement over 2005 levels. The U.S. ATP deficit with China, however, increased $10 billion, and trade with China accounts for the entire U.S. ATP deficit in 2006. The United States had a trade surplus in ATP products with the rest of the world in 2005, which increased $14 billion in 2006. If the U.S. ATP deficit with China had not grown in 2006, the overall improvement in the U.S. ATP trade balance would have been much greater.

But for increases in the trade deficit in petroleum products and the deficit with China, the U.S. trade balance would have improved significantly in 2006, as shown in the figure below. U.S. trade problems would be greatly reduced if the United States imported less oil and balanced trade with China. 

The U.S. merchandise trade deficit has increased every year since 1991 (except for the recession year of 2001). The deficit reached 6.2% of GDP in 2006, as shown in the figure. U.S. petroleum imports and the trade deficit with China explain a growing share of this deficit, especially since 2002, after China entered the WTO and oil prices began to rise rapidly.  Excluding petroleum products, the U.S. trade deficit with the rest of the world (except China) declined in 2006. If the United States could eliminate its trade deficit with China and achieve energy independence, then the remaining trade deficit could be reduced to a sustainable 2-3% of GDP. 

The U.S. deficit in manufactured goods rose from $602 billion in 2005 to $630 in 2006, an increase of 2%. Manufactured imports are responsible for the bulk of the U.S. trade deficit. The manufacturing sector has lost 3 million jobs since January 2001. Manufacturing employment picked up in late 2005 and early 2006, but 129,000 jobs have been lost since June of 2006. More than 35,000 U.S. manufacturing establishments closed between the first quarters of 2001 and 2006.

Trade deficits, manufacturing job losses and plant closures are due, in large part, to overvaluation of the U.S. dollar, which increases the prices of U.S. exports and makes imports cheap. Depreciation of the U.S. dollar against the Euro and Canadian dollar since 2002 has contributed to improvements in the U.S. trade balance with those countries. By contrast, China, Japan, and other countries in Asia have intervened heavily in foreign currency markets to artificially depress the value of their currencies. The U.S. trade deficit is unlikely to recover until they halt these practices and allow their currencies to appreciate substantially (e.g., 30% to 40%). Currency adjustment is needed now before these problems get any larger. The costs of adjustment will increase in the future if the trade deficit continues to grow. 

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