That's the type of dynamic that ought to help correct the U.S. trade deficit. So far, however, that hasn't happened.
Imports and Exports
In December 2003, well into the dollar's current decline, the monthly trade deficit hit a new high. Then it rose in January 2004, followed by another rise in February. The March trade gap was bigger still, and it was followed by more increases in April and June. The most recent data revealed yet another high, for October. Monthly deficits of $50 billion have now become the norm.
For Americans, a dinner in Paris or a stay in London is becoming more expensive, reflecting the rise in the euro from 86 cents in early 2002 to just below $1.35 yesterday.
(Remy De La Mauviniere -- AP)
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To understand why the deficit remains so stubbornly high, it is necessary to start with a simple statistic: The United States imports about 50 percent more than its companies ship overseas.
Thus for the trade gap to narrow, exports not only have to increase, as they have been, but they must also rise much faster than imports. The opposite has been occurring, as Commerce Department figures for October showed. Exports hit a new monthly high of $98.1 billion, which was 11.3 percent more than the previous year's level. But imports were $153.5 billion, 18.5 percent more than a year before.
Partly, the numbers reflect strong U.S. economic growth, which fuels demand for consumer goods. Because many of the most popular items, such as electronic devices and toys, are no longer made in the United States, American shoppers can't simply shift to domestic products if foreign goods become more expensive.
The experience of John Cahill, marketing manager for Pac-Rim Building Supply Inc. of Renton, Wash., helps explain another part of the problem: Changes in exchange rates affect exports and imports only after a considerable lag because companies buying goods from abroad typically don't switch suppliers that quickly.
Cahill ships U.S.-made construction materials like doors, kitchen cabinets and plumbing fixtures to Japan for people who want American-style homes. With the dollar down about 24 percent against the yen since early 2002, business is picking up, as it did in the mid-'90s when the U.S. currency was weak.
"But it's a slow, evolutionary process," Cahill said. "It's not like, the dollar weakens 15 percent so we get a 15 percent increase in business. It's more that guys over there will say, 'The dollar has weakened; I'll bet the American price is getting better -- maybe we should take a look at it.' So you go to trade shows, you start pounding on doors, and we do stuff like broadcast faxes and mailers. We're not in a sweet spot yet. It's still a tough market."
Moreover, trade between U.S. companies and their foreign affiliates accounts for about one-third of the trade deficit, according to a recent study by the McKinsey Global Institute, citing as examples vehicles that the Mexican affiliates of General Motors and Ford ship to the U.S. market. "Even fairly large changes in the value of the dollar are unlikely to make a difference" to much of that commerce, according to the study, "particularly in cases where the investment is in an emerging market with labor or land costs only one-tenth of those in the United States."
Another huge factor is that the dollar, while declining steeply against the euro and a few other major currencies since early 2002, hasn't fallen much against the currencies of other big trading partners -- indeed, it rose against the Mexican peso during that period. And in the case of one particularly important trading partner, China, the dollar hasn't budged in nearly 10 years because Beijing keeps its yuan pegged to the U.S. currency.
