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US trade deficit deepens

The Washington Post summarises (here) the structural problems the United States is having with its trade deficit. The deficit soared to a $725.8 billion in 2005, a record in dollar amounts and as a fraction of the size of the economy (5.8% of GDP). It is up 17.5% from last year. Nearly a quarter of the deficit is with China, though significant deficits also arise with the EU ($122b), Japan ($83b), Canada ($76b), Mexico ($50b) and OPEC countries ($93b).

Interestingly, even without the 39% hike in oil prices the US experienced during 2005, the deficit would still have been a record $660b.

The deficit is partly a reflection of the strength of the US economy relative to its trading partners. However as it does indicate rising indebtedness of the US economy, some commentators worry that the rising debt will tigger forecasts of a collapse in the US dollar and rising interest rates.

Yet no signs of this: the US dollar has been appreciating against most currencies.

Others worry about the increased debt burden on future generations. Others see the deficit as a positive and a vote of confidence in the strength of the US economy – they deny that debt necessarily accrues at all!

Jeffrey Frankel sees a major concern about the deficit as the concern itself which may trigger further calls for US protectionism. Members of Congress and US trade unions have already been seeking such.

Generally the deficit reflects a deficiency of US savings and high savings rates in other countries such as China. That a rapidly-growing developing country is financing the consumption of the wealthiest large nation is of intense concern.

As John Quiggin notes, because ever increasing levels of deficits are unsustainable they won’t be. I agree with this, but the issue is whether there will be a ‘hard-landing’, with a rapid fall in the US dollar, higher US interest rates and a fairly nasty global recession or whether things will work themsellves out gradually over a number of years with gradual increases in US savings, a fall in the US dollar and so on.

I’ll think about this. My instincts are for gradual adjustments given that the US is experiencing deficits during a period of strong growth. The world economy too is generally growing strongly. There would seem to be time for necessary adjustments to occur given the right policy settings. The issues to focus on concern policy settings that will promote gradual adjustments (in particular, to raise US savings) and to avoid the foolish calls for protectionism.

4 comments to US trade deficit deepens

  • Bring Back EP at LP

    I am for a sharp adjustment.

    At present the markets are complacent with large current account deficits both here and in the USA.

    At some stage this will change and they will ‘suddenly’ be overcome with fear of large current account deficits.

    to me the major question is given commodity prices how in hell have we such a large one. even Gough had a surplus with similar commodity prices.

  • hc

    Well, Homer (I think), I guess that you might get big deficits during a commodities boom if foreigners are really gung-ho about your economy and want to invest lots of money there. This makes some sense. In recent years Australia has been one of the best performing (developed) economies in the world and out national resource assets (mining and agricultural) are amazing. The deficits could be a sign of strength and confidence in the Aussi economy.

  • Bring Back EP at LP

    I would agree except that why would non-commodity companies have a higher ROE than elsewhere?

    Importd seem to be correlated with consumer spending at present rather than capital investment

  • hc

    Homer, Have a look at the recent RBA report on monetary policy. There is a broad-based investmebnt boom going on in Australia. Business borrowing now growing faster than consumer borrowing.