Rising imports offset U.S. sales abroad

By Howard Schneider
Washington Post Staff Writer
Wednesday, July 14, 2010; A14

Americans' resurgent appetite for imports may undermine the Obama administration's effort to rekindle job growth, with a rise in overseas purchases by American businesses and households undercutting the benefits of increased U.S. sales abroad.

A sharp jump in the monthly trade deficit in May -- driven by a spike in imports from China -- also added to concern about a resurgence of patterns linked to the recent economic crisis.

Judged in isolation, American exports have rebounded smartly since the depths of the recession, up roughly $63 billion through May compared with the corresponding period a year ago -- and in theory generating perhaps 350,000 or more new jobs, according to the economic assumptions used by the Obama administration.

But employment growth over the past year has remained relatively flat, and experts point to the widening trade deficit during the same period as possibly offsetting whatever boost in jobs has occurred.

New data released Tuesday show that dynamic at work. Exports in May rose by a healthy 2.3 percent from April, as U.S. businesses sold billions of dollars more across a broad array of goods, from heavy equipment to chemicals and corn. Imports, however, increased by even more, pushing the monthly trade deficit to $42.3 billion.

Though the value of one major import -- oil -- declined in May, purchases of imported consumer goods, capital equipment and other products raised the prospect of American debt continuing to prop up the global economy -- an imbalance that many cited as a cause of the recent crisis, and something that world economic authorities argue needs to change.

The trade deficit "is a net detractor for jobs so it does make it harder to restore full employment," said C. Fred Bergsten, head of the Peterson Institute for International Economics. "It is heading back up and no one knows at what point it might hit a crisis level."

The latest data show the dilemma faced by an administration that has set its job-creation strategy around a boost in exports -- $1 billion in overseas sales adds about 6,000 jobs, according to White House estimates -- but has few tools at hand to prevent an offsetting rise in imports, short of policies likely to be labeled protectionist, or diplomatically sensitive steps such as a fight with China over its currency policies.

An increase in imports is not in and of itself a bad thing. Consumers benefit from lower prices, businesses import specialty equipment or pay less for goods needed to make other products, and higher global growth benefits U.S. firms. But large and growing trade deficits are not considered sustainable, and there is broad agreement among the heads of the world's major economies and at organizations including the International Monetary Fund that global trade patterns need to change so that countries with large surpluses, including China and Germany, consume more and so that those with large deficits bring their national accounts into line.

The current monthly U.S. trade deficit remains far below the historic peak reached in the run-up to the financial crisis, when the figure topped $60 billion monthly. But its steady expansion during the economic recovery means the United States may not be heading toward the hoped-for pattern of a higher national savings rate and less wealth being sent overseas.

Analysts said the larger trade deficits would shave perhaps half a percentage point or more from their estimates of U.S. economic growth, significant at a time when the pace of the country's economic recovery was already thought to be moderating.

"The widening trade gap is putting downward pressure on U.S. [gross domestic product] when it is most vulnerable," PNC Bank chief economist Stuart Hoffman wrote in a research note. "Less domestic production, because of increased imports and less demand for higher-priced U.S. exports, means less job creation in the manufacturing sector, a higher unemployment rate, and less income growth domestically."

The Obama administration did not respond to a request for comment.

Business groups used the data to argue for a new push on stalled free trade negotiations, arguing that a continued rise in imports is likely inevitable, and can only be combated by pursuing new markets for U.S. goods.

"The U.S. worked very hard to build a rules based trading system and if we were to say we need to play with it here and there the rest of the world will do the same thing and it will all come apart," said Franklin Vargo, vice president for international economic affairs at the National Association of Manufacturers. "Fundamentally we aren't enough of an exporter."

Others said it should prompt Obama to broaden his focus from exports alone, to include either policies that discourage imports or take a more aggressive stance on issues like China's management of the value of its currency.

China's yuan is widely considered to be undervalued, and while the government in Beijing recently said it will allow the currency to appreciate -- making its goods more expensive on world markets -- the increase is not expected to be quick, or to have much short-term impact on the flow of trade.

"The widening trade deficit is not only an alarming trend, but also represents wealth and jobs heading overseas," said Scott Paul, executive director of the American Alliance for Manufacturing, a trade and labor group that has advocated both a tougher line on China's currency, and the use of tax breaks and other policies to encourage the substitution of U.S.-made products for imports.

The Obama administration did not respond to a request for comment.

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