Exports Rise but so do Imports

Export figures have made encouraging reading last year and this. According to David Huether, chief economist at the National Association of Manufacturers and reported in a Businessweek.com article exports rose 14% in the 12 months through February.

Does that mean the trade deficit that had so suddenly shrunk in 2008 as imports slumped has continued to contract? No unfortunately not. As the economy has grown at an estimated annual rate of 3.2% in the first three months of this year exports have grown at 5.8% but imports have grown at 8.9% according to Commerce Dept. figures quoted in the article. In fact the recession although originally appearing to help the trade deficit by cutting imports has probably exacerbated it in the longer term as manufacturing operations have closed and are unlikely to be replaced.

Does a trade deficit matter you may ask? Well certainly the US is not alone in moving from surplus to deficit. Along with nearly every major OECD market the US has migrated from making things to providing services, but the economy’s reliance on consumers for growth means that imports rob growth because as consumers spend more an increasing proportion gets spent overseas not at home.

According to the Bureau of Labor Statistics quoted in the article, U.S. employment in manufacturing over the past six months has been the lowest since March 1941. The March total was a little under 11.6 million workers, down 19% in just the past five years. Manufacturing’s share of GDP shrank from 25% in the 1960s to 15% in 2000 and just 11% in 2008, according to data from the Commerce Dept.’s Bureau of Economic Analysis. That is not to say the US doesn’t have world class manufacturing companies but increasingly they are manufacturing overseas. GM is on track to manufacture 2 million vehicles in China this year. According to their own data they produced just 2,084,492 vehicles in the US in 2009 meaning they could soon be making more cars in China than they do in the US.

Conventional wisdom says that in an affluent society manufacturing moves up the value chain as wage costs become too high for more commodity products. But even here there is scant comfort. In the first two months of 2010, the U.S. bought nearly $15 billion worth of advanced technology products such as computers from China, but sold China only $3 billion in high-tech goods, according to Commerce Dept. data.

Rising commodity prices don’t help the situation; the US is a major importer of oil, the price of which has doubled over the last 12 months. The disaster in the Gulf of Mexico may well have closed off one area of reduced dependency on foreign oil by taking deep water offshore drilling in US waters off the agenda for the rest of this administration’s time in office.

There is no easy answer to the trade deficit, as the economy recovers and consumers spend more the import bill will rise. The current strength of the US dollar as a safe haven in the sovereign debt crisis will only make matters worse by reducing exporters ability to balance the trade books.

–Stuart Burns

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