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The good (and maybe bad) of the declining U.S. trade deficit

U.S. exports reached a record $2.27 trillion in 2013, and the overall trade deficit narrowed. Yet the United States still bought a gargantuan amount of stuff from China last year – a record amount of red ink on the trade accounts. And despite the strong export performance, growth over the year was anemic.

Good news?  Bad news?

In the midst of a battle over whether the United States should pursue new free trade agreements, the year-end data on international trade left both sides with a bit of leverage.

The headline outcome – a nearly 12 percent decline in the country’s trade deficit for the year – was trumpeted by the Obama administration as evidence that its attention to exports is paying off.

But the record amount of overseas sales still leaves the administration far behind in its goal of having the United States generate about $3 trillion in exports by the end of this year, a figure that would require more than 30 percent growth in the next 12 months. And, as the chart below shows, the rapid growth in exports as the world bounced back from the crisis a couple of years ago has flattened.

Exports bounced back fast after the crisis, but growth has slowed.

...still, an energy boom means the trade deficit has narrowed.


Still,  Commerce Secretary Penny Pritzker said in an e-mailed statement: “We’ve achieved a fourth-consecutive year of record-breaking export levels…American companies clearly understand the value of selling their goods and services all over the world.”

On an economy-wide basis, the fact that the trade deficit narrowed was a prop to growth. As a share of overall economic output, the gap between imports and exports fell from 3.3 percent of gross domestic product in 2012 to 2.8 percent last year, meaning the deficit was less of a drag on the economy as a whole.

“In terms of the macro impact and the impact on growth, what matters is the narrowing of the deficit. That is helping growth in the U.S., and it is what would help job growth,” said Nariman Behravesh, chief economist with the IHS Global Insight consulting firm.

But from there, the debate gets messier. Much of the improvement in U.S. trade accounts came from the displacement of imported oil with domestically produced energy. The folks at the Economic Policy Institute and the Alliance for American Manufacturing were quick to note that, once oil is factored out, the deficit in manufactured goods grew wider over the year, while the gap with China stood at over $318 billion. That makes a single country responsible for two-thirds of the total U.S. goods and services trade deficit of $471 billion.

Are we swapping our role as an industrial giant to become a resource economy? Not quite – the trade accounts were also supported by the country’s large surplus in services.

But it does raise the question of whether a dollar of extra oil production produces more or less of a job impact than a dollar of extra production of some other good.

Broadly considered, Behravesh said, the energy boom did produce an estimated 2 million jobs over the last five years. But it is hard, if not impossible, he said, to estimate whether the narrowing of the country's "oil gap" is fully offsetting its continued "other manufactured stuff gap."

There are a host of other links to consider. By assuring supplies and keeping prices moderate, for example, the energy boom may set the stage for other industries to invest more here – and start making up ground in other components of the trade deficit.

There is also a tangle of whether trade deficits with specific countries matter.

Should we care about a large deficit with China if the overall outlook is improving? The U.S. Business and Industry Council notes that the deficit with Korea has been getting larger since the United States signed a free trade agreement with that country, which the group argues is a reason not to sign free trade agreements. But then so, according to EPI, did the overall deficit with the 11 nations negotiating to join the Transpacific Partnership with the United States, which the group implies is also not a reason to sign free trade agreements.

As a rule of thumb, U.S. officials say that a billion dollars of exports generates 5,000 jobs. But refining that by sector becomes more complex (and they do have a habit of ignoring the opposite – that presumably a billion dollars of imports cuts 5,000 jobs).

Over at the Office of the U.S. Trade Representative, even the Korea outcome had a silver lining: It was due, said a spokesperson, to the fact that the country's economy overall turned down. Korean imports from other nations like Japan and India fell more sharply than did its purchases of U.S. goods. Factor a couple of goods like coal -- where imports slowed along with the Korean economy -- and exports to Korea did in fact rise.




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Lydia DePillis · February 6, 2014

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