Not a month has gone by this year in which the U.S. trade deficit has failed to hit a new record -- and a government report issued yesterday provided no exception, showing a $48.3 billion trade gap for April.
The Commerce Department report surprised many economists who had been expecting the deficit in goods and services to narrow from the record posted in March, which the department revised upward to $46.6 billion. Other revised figures showed that each of the three previous months were also records that have now been surpassed.
The report dampened hopes that the deficit would abate in the months ahead. It indicated that demand among American consumers for foreign-made goods remains powerful despite the decline of the dollar against other major currencies. A lower greenback raises the cost of imports relative to U.S.-made products.
"This highlights the fact that it's going to take a lot more than a 10 percent broad, trade-weighted decline in the dollar to get the trade deficit to right itself," said Mark Zandi, chief economist of Economy.com, referring to the fall in the greenback since its peak in February 2002. "It's a pretty ugly number."
Ethan Harris, chief U.S. economist at Lehman Brothers Inc., agreed, noting that last autumn analysts thought the trade gap was peaking at about $40 billion a month. "Now we can see that it's not," Harris said. "The weakness in the dollar over the last couple of years has helped U.S. exports a bit, but the broader demand out of the U.S. economy is just overwhelming that. You've just got a huge appetite from the U.S. for imported products."
Bush administration policymakers have tended to play down the importance of the trade deficit, noting that it stems in part from faster growth in the United States compared with other countries, which translates into high U.S. demand for imports and sluggish demand overseas for U.S. exports. Some Democratic economists share the view that the gap between imports and exports fails to reflect many complexities of the global economy.
Laura D'Andrea Tyson, who was President Bill Clinton's chief economic adviser, wrote in Business Week this month that trade statistics give a "deceptive" picture, falsely suggesting that American firms are losing out to foreign competitors. In fact, U.S. multinationals play a major role in the nation's international trade, noted Tyson, who is now dean of the London Business School. She cited 2001 figures showing that such companies accounted for about 38 percent of U.S. merchandise imports, while trade between U.S. parent companies and their overseas affiliates accounted for about a quarter of U.S. exports and 16 percent of imports.
But at about 5 percent of U.S. gross domestic product, the trade deficit poses a major risk, many other economists contend. The reason is that when Americans buy so much more from abroad than they sell, they must effectively borrow the difference from foreigners, who take the dollars they receive and invest them, mostly in U.S. Treasury bonds. If foreigners should lose confidence in the U.S. economy and decide that they hold too many U.S. assets, the sell-off of American securities could send the dollar crashing and interest rates soaring.
John Williamson, an economist at the Institute for International Economics who recently wrote a paper on global trade imbalances, said, "It's possible that there will be a gradual, orderly adjustment" in which the dollar and the trade deficit subside. "But the longer it goes on, the greater the risk that the contrary will happen -- that the dollar will suddenly fall, because nobody's willing to lend [Americans money] anymore, and other countries won't be expanding their demand at that time." The likely result of such a scenario, Williamson said, would be "world recession."
Yesterday's report showed that imports rose 0.2 percent in April, to $142.3 billion, but exports fell 1.5 percent, to $93.9 billion. The export decline, which followed several months of strong gains, "is not the start of a weaker trend; it should substantially reverse next in May," said Ian Shepherdson, chief U.S. economist for High Frequency Economics, in a note to clients.