Thursday, 24 of May of 2018

Economics. Explained.  

Trade Deficit

May 3, 2018

The trade deficit for March narrowed by $8.8 billion to $49.0 billion after having widened by $1.0 billion in February.     Exports rose 2.0%.  Imports declined by 1.8%.  While the rising trade gap earlier in the year seemed scary, the reality is that it is financed by foreign capital inflows into the U.S.  Thus far foreigners seem quite willing to invest in the U.S.  And with the prospect of tax cuts boosting the pace of GDP growth in the U.S. and lifting the U.S. stock market, such capital inflows should continue apace.  Trump’s imposition of tariffs on all steel and aluminum imports is a step in the wrong direction.  We certainly support the notion of free trade.  Through trade American consumers have access to a much wider variety of goods and services at lower prices than they would otherwise.  But the free traders (like us) assume that there is also fair trade.  That is the rub.  The Chinese in particular, and others ,do not play by the same rules as everybody else.  Thus, in our opinion, some sort of  punishment is appropriate.  But rather than imposing tariffs on all steel and aluminum imports (and possibly tariffs on other products) which hurts our neighbors and allies as well as the bad guys, we would support a more targeted approach.  Find the top 10 culprits and impose a 50% tariff on their imports of these products.

Frequently exports and imports can be shifted around by price changes rather than the volume of exports and imports.  Thus, what is really important is the trade deficit in real terms because that is what goes into the GDP data.  The “real” trade deficit narrowed by $6.9 billion in March to $62.1 billion after having narrowed by $0.9 billion in February.

Increasing energy production in the U.S. is having a significant impact on our trade deficit in oil.  Since 2007 real oil exports have almost quadrupled from $3.0 billion to $11.0 billion, while real oil imports have fallen from $23.0 billion to $17.0 billion. As a result, the real trade deficit in oil has been cut by about $14.0 billion or 66% in the past several years and is the smallest since the early 1990’s.  Most energy exports believe that by the end of the decade the U.S. will not only surpass Saudi Arabia and Russia  and become the world’s biggest producer of oil, but also become a net exporter of oil.  Very impressive!  And now with U.S. producers allowed to export oil, that could happen even sooner.

Significant strength or weakness in the dollar can impact the trade deficit for any given period of time.  For example, the dramatic 22% rise in the value of the dollar from October 2014 through the end of 2015 subtracted about 0.5% from GDP growth in both 2014 and 2015.  But the dollar has fallen about 5.0% in the past year.  As a result, we expect the trade component to have little impact on GDP growth in 2018.

The non-oil trade gap has widened significantly  in the past year to about $66.0 billion as non-oil exports rose 6.2% while non-oil imports climbed by 7.1%.

Stephen Slifer


Charleston, SC

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