Source: Continuous Improvement Associates

Social Issues
Trade Truth #2: The Dollar & The Deficit
By Bob Powell, 4/27/08

There are persistent misrepresentations, misleading statements, and prevarications about what's going on related to "trade." The use of selective facts and statistics has the obvious intent to obfuscate.

The falling dollar did not increase the rate of goods export growth as pro "free trade" advocates maintain it should. The trade balance was less negative by $50B in 2007 because of increased growth of services exports and decreased growth of goods imports. Oil is a problem, but it's less than 20% of the trade deficit. The petroleum deficit fell in real dollars by $4.6B in 2006 and $3.9B in 2007 despite rising oil prices. There's a major structural problem driving the U.S. toward economic collapse.

The "trade" truth deficit:

Superficial truth: Yes, the "trade" deficit fell by $50.0B in 2007; pro "free trade" advocates say that's thanks to a falling dollar, which increases the competitiveness of U.S. goods.

Truth about goods: But goods export growth didn't increase relative to 2006; goods import growth actually fell. This is related to the U.S. having a goods trade deficit. This import growth decline would be good, if it weren't an early sign of economic collapse.

Truth about services: Services export growth rose compared to 2006 more than services import growth. This is related to the U.S. having a services trade surplus.

Truth about oil: Many blame the trade deficit on oil imports. But the petroleum deficit fell in real dollars by $4.6B in 2006 and $3.9B in 2007 despite rising oil prices. It's been about 20% of the trade deficit for the past six years.

Up front, to spare readers the need to go through the gory, sordid details, there's an overall summary of why the "trade" deficit fell in 2007 compared to 2006, followed by a summary of the details. The proof follows with the gory details: yes, with the usual data and graphs (please look at them ... "a picture is worth ...").

Note on graphs: I can't help it. Have you seen episodes of the TV series, Monk? If so, you get the idea.

Comments follow on articles indicating an incredible lack of understanding of, and flawed presentation of, what's happening. Go to the articles and comments below using these links:

Summary of 2007 and differences between 2007 & 2006:

Overall summary

A falling dollar did not increase the rate of goods exports; it did increase the rate of services exports. Oil is less than 20% of the trade deficit problem; it's important, but not determining.

Trade Balance: In 2007 an improved services balance contributed somewhat more than an improved goods balance to overall trade balance improvement. Improvement in 2007 compared to 2006 was from both an increased rate of exports and decreased rate of imports.

Goods: Improvement in 2007 over 2006 was from a decreased rate of goods imports, even overcoming a slightly decreased rate of goods exports. Without a falling dollar the rate of goods exports would likely have fallen even more than it did; the U.S. has a massive goods trade deficit.

Services: Improvement in 2007 over 2006 was from an increased rate of services exports, even overcoming a slightly increased rate of services imports. A falling dollar stimulated services exports; the U.S. has a services trade surplus.

Summary details on total trade balance (= exports - imports) 

2007: Improved by +50B. That is, the total trade balance was less negative by $50B

The trade balance in 2007 was less negative because, obviously, exports increased more than imports. This was true for both goods (+$22.9B) and services (+$27.1B) for a total trade balance improvement of +50B.

An improved services balance contributed somewhat more than an improved goods balance to overall trade balance improvement.

2007 compared to 2006:

Total Balance growth increased by  $94.2B
Total Exports growth increased by  $20.1B
Total Imports growth decreased by  $74.2B
            [$20.1B - (-$74.2B) = $94.2B]

Improvement over 2006 was from increased growth of exports, but mostly from decreased growth of imports.

Question: Were these effects from goods or services or both, and to what degree?

Obviously, the trade balance can improve because exports increased more than before OR because imports increased less than before ... and this can be for either goods or services. Which of these is the case for exports and imports tells us something about what's happening in the economy.

So we need to ask,
"What's different about the changes in 2006 and 2007 for both imports & exports of goods & services?"

Factor 1: Summary details on Services

2007: $27.1B increase in the services balance.

2007 compared to 2006:

Services Balance growth increased by $20.1B
Services Exports growth increased by  $22.4B
Services Imports growth increased by   $2.3B 
            [$22.4B - $2.3B) = $20.1B]

Improvement in 2007 over 2006 was from increased growth of services exports, even overcoming slightly increased growth of services imports. That makes sense because we actually have a trade surplus in services and the falling dollar helped increase exports.

Why? The world buys more of what we produce when the dollar falls. Imagine that.

Factor 2: Summary details on Goods

2007: $22.9B increase in the goods balance (exports - imports).

2007 compared to 2006:

Goods Balance growth increased by  $74.0B
Goods Exports growth decreased by   $2.4B
Goods Imports growth decreased by $76.4B 
         [-$2.4B - (-$76.4B) = $74.0B]

Improvement over 2006 was from decreased growth of goods imports, even overcoming slightly decreased growth of goods exports. That makes sense because of a stalling U.S. economy, stagnant wages, and a falling dollar ... we can't afford to buy. The U.S. is making less and less, so a falling dollar doesn't help. Without a falling dollar the growth rate of goods exports would likely have fallen even more than it did.

Why? The world doesn't buy more of what we don't produce even when the dollar falls. Imagine that.

Factor 3: Oil isn't a major factor

Relatively speaking, oil is not our major "trade" deficit problem. Yes, it's a problem, but it's less than 20% of the problem. 

In fact, the petroleum deficit actually fell by $4.6B in 2006 and by $3.9B in 2007 (in 2000 chain-weighted dollars) despite rising oil prices. Oil has been an ever-decreasing fraction of the "trade" deficit for well over a decade. In 1997 it was about 50% of the deficit, a decade later in 2007 it accounts for less than 20% of the U.S. trade deficit.

Why? Because the U.S. goods trade deficit has exploded.

These summaries are relatively quick, but proving the points takes some doing.


The sordid details

Note: Sordid is appropriate because what's happening to the U.S. is indeed depressing and morally repulsive. It's tragic.

What about Oil?

Look at overall trade and the part petroleum plays. What we find is that petroleum is NOT the major contributor to the U.S. "trade" deficit.

Here's the Total Trade Deficit since 1996 with Petroleum and Non-petroleum broken out. Note that the petroleum deficit has been relatively flat despite the increasing price of oil. The petroleum deficit actually fell (in chain-weighted 2000 dollars) by $4.6B in 2006 and by $3.9B in 2007.

Note on data sources: 1996 to 2004 data is here ... after that see the FT900 data. These sources omit 2005. I only have the 2005 numbers because Dave Anderson's work prompted me to look at this issue last year.

Total Trade Deficit and Petroleum Component

Here's the ratio of the petroleum deficit to the total deficit. The ratio is up slightly from last year. While petroleum is a slightly larger share of the total deficit in 2007 because the overall deficit was $50B less (down to $708.5B from $758.5B), the petroleum/total ratio has held at between 18 and 20 percent for the past four years.

Petroleum fraction of the trade deficit

So oil is not responsible for our huge trade deficit or even most of its growth.

Oil has been an ever-decreasing fraction of the "trade" deficit for well over a decade. It's only about 18 to 19 percent of the U.S. trade deficit even with a falling dollar. In fact, the petroleum deficit fell (in 2000 chain-weighted dollars) by $4.6B in 2006 and by $3.9B in 2007 despite the higher price of oil. Why? Because the U.S. economy is slowing.

UPDATE: Here's month-by-month data since 2006 through May 2008 from Exhibit 11 at FT900: U.S. International Trade in Goods and Services.

Petroleum & Total Trade Deficits, Monthly (in 2000 Chain-weighted Dollars)

Petroleum Deficit to Total Trade Deficit Ratio, Monthly (ratio of data in graph above)

The 2000 Chain-Weighted value for total trade in 2007 was -$654,792M and the unadjusted amount was -$708,515M. This means the 2000 Chain-Weighted value for petroleum in 2007 of -$121,078M was an unadjusted -$131,012M.

One might expect that the trade deficit in petroleum would have gone up by as great a proportion as the increase in the price of gasoline. It's so "obvious" that this should be the case that it seems many have been misled to believe that the high price of oil is mainly responsible for our trade deficit. But we can thank the five major multinational oil companies for high price of gasoline. That oligopoly has manipulated supply (likely primarily through restricting refinery capacity) to raise gasoline prices to reap the greatest profits in the history of the world (e.g. Exxon-Mobil), and their access to oil on public lands is royalty free.

Update 5/2/08: On 5/1/08 Exxon Mobil reported first-quarter profit of $10.89B, up 17 percent from the previous year.

What about the "Trade" Deficit drop?

The questions answered in this article: What contributed to the improvement of the trade balance decline in 2007? Was it imports or exports? Goods or Services?

Note: Imports and exports for both goods and services increased in 2007. We have to compare changes from the previous year to understand what happened to the trade balance (deficit = - balance). This can be confusing because we're examining changes in the rates of change (growth or decline) of imports and exports, not changes in the magnitudes of imports and exports. I find myself stating things incorrectly at times and hope I've caught them all. If you see errors or confusing points, please let me know. Thanks.

Total "Trade"


The "trade" deficit at one time was small and the U.S. even had a small surplus for long periods. It grew in the 80s, largely because of oil. In late 1971 Nixon dismantled the Bretton Woods Agreement, which decoupled the dollar from gold; he followed this with multiple devaluations of the dollar. In response, in late 1973 OPEC quadrupled the price of crude oil. Carter was later blamed for the resulting massive inflation and cast as having ill-managed the economy (see The Oil Shocks of the 70s).

In the late 1985, Reagan's Plaza Accord devalued the US dollar again in relation to the Japanese yen and German Deutsche Mark.

Many complain that policies that promote inflation are a form of theft. These devaluations, resulting in inflation, can arguably be seen in that same light.

Total Trade Deficit: History 1960 - 2007.


Deficit vs. Debt: Even though the deficit was smaller ($708.5B in 2007, instead of $758B in 2006), it remains extremely large and continues to add greatly to "trade" debt. Debt (a stock) is the accumulation over time of the deficit (a flow).

"Trade": I often put this in quotes because most of what's happening lately is really a result of "transfer of the factors of production", not real trade (see The Trade Deficit and the Fallacy of Composition).

The trade deficit, after growing steadily since 1991 (except for the 2001 recession pause), fell somewhat in 2007.

Total "Trade Deficit" 1990 to 2007. It's a little less in 2007, but still large and adding greatly to Trade Debt.

This graph shows that both imports and exports have been growing, but the rate of growth of imports slowed somewhat in 2007.

Total Imports and Exports: In 2007 imports rose somewhat less than exports

To better see how much, the next graph shows the growth rate changes in 2007. Note that because exports increased by $182.7B and imports increased by only $132.6B, there was a $50.0B improvement in the trade balance.

Total trade balance, total imports, & total exports changes in 2007

But to what do we attribute the difference between 2006 and 2007?

The graph below adds 2006 to the previous graph. We see that the growth rate of exports in 2007 was somewhat more than in 2006, but the big difference is the large drop in the growth of imports. The difference in the rate of change of the trade balance between 2006 to 2007 was $94.2B. That was $74.2B from a decrease in the growth of imports and $20.1B from an increase in the growth of exports.

Exports did not increase as much from 2006 to 2007 nearly as much as imports decreased

So the import rate dropped greatly in 2007 and export rate rose. To understand why, we need to look at imports and exports for both goods and services.


Goods imports and exports both increased in 2007, but it's apparent that goods import growth slowed in 2007.

Goods imports and exports both rose in 2007.

The graph below shows the growth rate changes for goods in 2007. There was a smaller increase in goods exports than goods imports; that improved the 2007 goods trade balance by $126.1B - $103.2B = $22.9B.

Trade goods balance, goods imports, & goods exports changes in 2007

But to what do we attribute the difference between 2007 and 2006?

The graph below adds 2006 to the previous graph. Instead of a goods balance growth that was negative by $51.1B in 2006, there was a $22.9B increase in the growth rate of the goods balance in 2007 for a relative growth rate improvement compared to 2006 of $74.0B = $22.9B + $51.1B.  

Growth Rate difference for:
Imports = -$76.4B ($103.2B - $179.6B)
Exports = -$2.4B ($126.1B - $128.5B)

   $74.0B = $2.4B - (-$76.4B)

So the difference is primarily from a greatly decreased growth of goods imports in 2007. The growth rate of goods exports was slightly smaller.

Goods exports increased slightly less in 2007 than in 2006, but imports increased much less

The increase in goods imports was less in 2007 because U.S. purchasing power fell thanks to a slowed U.S. economy, stagnant wages, and a falling dollar. Because the U.S. is producing fewer and fewer goods, goods export growth stalled even with a falling dollar, which in theory makes U.S. goods more competitive. 


Both services imports and exports increased faster in 2007 than in 2006.

Services imports and exports both rose in 2007

This is more apparent in the graph below. The services balance increased by $27.1B because the services exports increase, $56.6B, was a lot more than services imports increase, $29.5B.

Trade services balance, services imports, & services exports changes in 2007

But to what do we attribute the difference between 2007 and 2006?

The graph below adds 2006 to the previous graph. Instead of a services balance that was more positive by $7.0B in 2006, there was a $27.1B more positive goods balance in 2007 for a relative improvement compared to 2006 of $20.1B = $27.1B - $7.0B.  

Growth Rate difference for:
Imports = $2.3B = $29.5B -$27.2B
Exports = $22.4B = $56.6B -$34.2B

  $20.1B = $22.4B - $2.3B 

So the difference is primarily from a much greater growth rate of services exports in 2007. The growth rate of services imports was only slightly greater.

The U.S. actually has about a $100B surplus in services. When the dollar falls, we can export even more of what we have a surplus in. Surprise, surprise.

Services exports increased more 2007 than in 2006, but imports increased only slightly

Comparing 2001 and 2007

The graph below shows that in 2001, when the U.S. economy was in decline, import growth dropped about twice as much as export growth. The world to which we were exporting took less of a hit than did the U.S. economy. That makes sense; in a U.S. economic slowdown, U.S. took a bigger hit in purchasing power.

What happened to imports is similar to what happened in 2007, but exports rose in 2007. Why was that?

Trade import and export changes from previous year, 2000 to 2007

Because trade in goods is much greater than trade in services, the graph below for goods looks much like the one above. In 2001 the growth rate of goods imports also dropped about twice as much as for exports. Again, goods import growth rate behavior is similar to that in 2007. But the goods export growth rate fell slightly; the falling dollar probably prevented a much greater drop in the goods export growth.

Goods import and export changes from previous year, 2000 to 2007

Not similar is what happened with services. In 2001 the growth rates for both imports and exports dropped about the same. In 2007 the dollar was falling and that helped improve services export growth.

Services import and export changes from previous year, 2000 to 2007


2007: That 2007 goods change of $22.9B plus services change of $27.1B = $50B, which is how much the overall trade balance improved.

2007 vs. 2006 Recap:

The trade balance improvement in 2007 compared to 2006 was primarily from decreased growth of goods imports and increased growth of services exports.

Serivces: Greater growth in the services balance of $20.1B was from greater services export growth of $22.4B, even overcoming slightly increased services import growth of $2.3B. A falling dollar stimulated services exports. The U.S. has a services surplus.

Goods: Greater growth in the goods balance of $74.0B came from slower growth of goods imports of $76.4B, even overcoming slightly slower growth of goods exports of $2.4B. Without a falling dollar, goods export growth would likely have decreased even more than it did. The U.S. has a massive goods deficit.


Articles Illustrating a Lack of Understanding of What's Happening

Statements on which I comment are bolded.

Samuelson: Marching Backward on Trade
There's so much wrong in this one by Samuelson, it's difficult to keep track.

Marching Backward on Trade By Robert J. Samuelson
Washington Post, April 16, 2008; Page A15

Almost everyone wishes for a renaissance of American manufacturing, and none say so more loudly than the Democratic presidential candidates and Democratic members of Congress. The trouble is that their deeds don't match their words. They have blamed trade for almost anything that might ail the U.S. economy -- in particular, manufacturing -- when the opposite is now true: Only through expanded trade can the economy thrive and manufacturing stage a comeback.

Brilliant! Brilliantly obvious. And brilliant obfuscation.

The question is, "What kind of 'trade'?" Exports, fine. Imports, not fine when they massively exceed exports. See the data above. Goods export growth in 2007 was less than in 2006.

I've documented at The NAFTA Nemesis that before NAFTA exports, the growth of exports, and the acceleration of exports to Mexico were all greater than for imports. Now it's the reverse, imports overwhelm exports by all measures.

The latest evidence of the gap between political rhetoric and economic reality is the Democratic-controlled House's decision to set aside, indefinitely, the free-trade agreement negotiated with Colombia by the Bush administration. On economic grounds, there's no reason to reject the agreement. Colombia's exports already enter the U.S. market duty-free under the 1991 Andean Trade Preference Act. Meanwhile, many U.S. exports to Colombia face stiff tariffs -- up to 35 percent on autos, 15 percent on tractors and 10 percent on computers -- most of which would ultimately go to zero under the agreement.

No reason? The effect will be more of the same kind of negative effects produced by NAFTA, as described at The NAFTA Nemesis.

The tariffs dampen demand for U.S. exports by raising their price and putting them at a competitive disadvantage. Whirlpool annually exports about $50 million worth of refrigerators, washer-dryers and dishwashers to Colombia from plants in Ohio, Arkansas and Iowa. On a $1,000 refrigerator, a 20 percent tariff raises the retail price $200 in a fiercely competitive market with appliances also supplied by local firms and imports from Korea and elsewhere. (Why does Colombia want the agreement? Answer: Congress has to renew Colombia's present duty-free status periodically. The agreement would make it permanent.)

Sure tariffs dampen demand for manufactured goods exports, but even with a falling dollar, goods exports increased less in 2007 than in 2006. The exports that increased relative to imports were in services, in which the U.S. has a trade surplus (not so for goods, for which there's a massive deficit).

Yet, it's politically convenient to oppose the trade agreement because the popular imagery is that trade destroys U.S. jobs. The loss of almost 4 million U.S. manufacturing jobs since 1998 seems easy to explain by cheap imports or the flight of plants to Mexico, China and other poorer countries. The truth is murkier: Although this has occurred, job losses also stem from greater efficiency (fewer workers producing more goods) and slumping domestic demand (for communications equipment and computers after the dot-com bust and for housing materials and vehicles now). Nor has falling factory employment crippled overall U.S. job creation.

The purpose of this paragraph is to make the truth murkier.

It's true that "the popular imagery is that trade destroys U.S. jobs." That is wrong. But it's not what Samuelson maintains. It's not the number of jobs destroyed overall, it's the high-paying jobs destroyed in key technology categories: manufacturing and IT. See Jobs & 'Trade' Data Update Apr08 showing the disastrous losses. Overall job creation is, over the long run, determined by Federal Reserve policies (see There's no 'free market' for Labor) intended to create greater labor supply than demand.

Look at the numbers. From 1998 to 2007, total non-farm payroll employment rose 12 million, and unemployment averaged only 4.9 percent -- despite the 4 million lost factory jobs. In that period, U.S. manufacturing output rose 22 percent.

More obfuscation. As noted above, the number of jobs is not determined by trade. This diversion is a popular tactic of offshoring proponents. See at the two links just above how the number of jobs has not nearly kept up with population growth. And the "unemployment" numbers are phony; see Unemployment: Official, Effective, Real. Real unemployment is more like over 12%, not 5%.

No matter. Globalization and trade have become lightning rods for myriad grievances (job insecurity, wage inequality, eroding fringe benefits). But even if trade caused all the factory job loss, its impact is shifting. The dollar's dramatic depreciation (down an inflation-adjusted 20 percent since early 2003 against a basket of currencies) has enhanced the competitiveness of U.S. exports. Their growth now looms as a major source of job creation and economic expansion.

The "dollar's dramatic depreciation" hasn't led to an increase in the growth of goods exports. It's led only to an increase in services export growth because the U.S. has a services surplus.

The overall trade deficit is dropping and, except for higher oil prices, would be dropping faster. In 2007, manufacturing exports rose 10.9 percent, double the 4.9 percent for manufacturing imports. At some companies, the effect is already noticeable. Consider Bison Gear and Engineering, a medium-size firm near Chicago that makes electric motors used for kitchen equipment, packaging machinery and medical devices. Since 2006, exports have increased from about 20 percent to 30 percent of total sales, says Chairman Ron Bullock. Bison has hired about 50 workers, bringing total employment to 250.

This is particularly egregious, propagating the propaganda that oil prices are the major problem. As shown above, the petroleum deficit actually fell in 2006 and 2007. 

The growth of goods exports fell! And goods imports completely overwhelm goods exports. Carefully selected examples prove nothing.

It is no longer necessary to rely on elegant theories of comparative advantage, more consumer choice or greater competition to favor open trade. Jobs and economic growth will suffice. Indeed, without export-led growth, the economy may face a sluggish future.

First, the fact is that "elegant theories of comparative advantage" DO NOT APPLY (see down the page at this link). Someone who calls himself an economist should know that.

Second, all U.S. policies have led to trade that's "import led." Goods imports overwhelm goods exports and goods export growth has stalled. It's only in services where there is relatively minor export-led growth.

Even after today's slowdown (recession?) ends, the outlook is worrisome. Consumers are heavily indebted. Housing will recover and reach previous highs, but probably not for many years. Government spending is constrained by growth in the rest of the economy, unless Congress sharply raises taxes or deficits. Exports and related investments are the best hopes.

No. The best hope is to achieve balanced trade that will protect (yes, protect!) domestic manufacturers so they can supply domestic demand instead of relying on imports, which have exploded and overwhelmed exports. See The Trade Deficit and the Fallacy of Composition for how to achieve balanced trade.

What House Democrats did was particularly perverse. They suspended trade promotion authority, which mandates that Congress vote up or down on trade agreements within 90 days of their submission. TPA gives other countries a reason to negotiate in good faith. They can make politically difficult concessions without fearing that Congress will ignore the agreement because it dislikes the U.S. concessions.

Americans do have legitimate trade complaints: China manipulates its currency to aid exporters; other countries restrict imports. It's in the U.S. interest to dismantle these obstacles. Now the suspension of TPA can serve as an excuse -- symbolically and substantively -- for other countries not to negotiate, just when U.S. firms can most benefit from market openings.

It's Samuelson who is perverse. Make no mistake about it; the U.S. is already in a trade war and has been since the 1990s. It's absurd to think that unilateral surrender through NAFTA and other agreements, prompts other countries to negotiate.

What matters for workers and manufacturers is not what politicians say. It's the consequences of what they do. On trade, many Democrats -- and some Republicans, too -- are fighting the last war.

Indeed, it is a war, but it's the current war, not the "last war." What pro-"free trade" Republicans -- and too many DLC Democrats -- have done is to undermine wages and destroy the U.S. economy. They, and others like Samuelson, should be ashamed for promoting what amounts to economic treason.


EPI Article 1: U.S. current account deficit improves in 2007 despite rising oil prices

U.S. current account deficit improves in 2007 despite rising oil prices by Robert E. Scott. Economic Policy Institute, March 26, 2008

The Bureau of Economic Analysis said last week that the U.S. current account deficit, the broadest measure of foreign trade, improved to $738.6 billion in 2007. The deficit fell from $811.5 billion in 2006, a decline of 9.0%. The current account deficit improved from 6.2% of GDP in 2006 to 5.3% for the year 2007. The decline in the current account deficit reflects the slowing U.S. economy and the cumulative effects of a lower dollar, which declined 22% between its peak in February 2002 and December 2007 and 6% in 2007 in real, inflation-adjusted terms. Although the current account deficit is likely to decline again in 2008 for the same reasons, further reductions in the U.S. structural deficits are unlikely unless China and other Asian countries allow the dollar to fall substantially against their currencies.

The cheaper dollar and strong global growth have stimulated U.S. exports, which have grown more than 14% per year since 2004 and increased 15% in 2007. At the same time, the U.S. economic slowdown and the falling dollar reduced the rate of growth of U.S. imports, which fell to 8% in 2007. The current account balance includes all goods, services, and investment flows between the United States and the rest of the world. Despite the improvement in the deficit, the United States still borrowed more than $2 billion every day in 2007 to finance its trade deficit.

The cheaper dollar has stimulated a greater 2007 growth of services exports. Despite a cheaper dollar, there was a drop in the growth of goods exports. The growth of goods imports fell.

The current account balance includes what are called "investment flows." This "investment" is actually the "selling off of America.

This "reduced the rate of growth of U.S. imports" statement is like what Gail Collins describes in The Fat Bush Theory, 4/19/08. She presents an analogy to Bush's goal of "reducing the growth of greenhouse gas emissions by 18 percent by 2012." The analogy: when he reduces the rate at which he's gaining weight, he's still getting fatter. His emissions goal is just like that; it's: "cutting our nation's greenhouse gas intensity -- how much we emit per unit of economic activity -- by 18 percent over the next 10 years." For more, see Global Warming: An Inconvenient-to-Understand Truth.

Systems thinking point: Reducing the rate of growth of something does not stop that something from growing. Understanding this is related to understanding the difference between stocks and flows. One can reduce the rate of flow of water into a bathtub, but that neither stops the tub from filling (unless the rate goes to zero) nor empties the tub (unless the flow rate goes negative).

This also applies to the trade deficit and the trade debt. Reducing its rate of growth of trade deficit (a flow) does not reduce the trade debt (a stock) to which it adds.

This obfuscation allows representations of progress when the truth is that something is only getting worse less rapidly.

The current account deficit also improved in the fourth quarter, falling from $709.8 billion (annualized) in the 3rd quarter to $691.7 billion in the fourth quarter. The deficit fell to 4.9% of GDP in the fourth quarter, the lowest level since the first quarter of 2004 (see chart). The U.S. trade deficit in petroleum products was responsible for more than one-half of the current account deficit in the fourth quarter. The United States must reduce reliance on imported, non-renewable energy sources in order to stabilize and reduce its current account deficits.

[For his chart of "U.S. current account deficit and the dollar, 1973-2007" go to the link.]

The petroleum deficit actually fell (in chain-weighted 2000 dollars) by $4.6B in 2006 and by $3.9B in 2007 in chain-weighted 2000 dollars,. This seems at odds with what Scott says. And the quarter-by-quarter petroleum deficit has been relatively flat (see the chart below from the Feb 2008 release of data at FT900).

Granted, this is the trade deficit, rather than the current account deficit, but this "one-half of the current account deficit in the fourth quarter" can only be true if there were massive increases in "investment" inflows into the U.S. (i.e., massive increases in the selling off of America).

In any case, it's either wrong or designed to obfuscate.

Petroleum Trade Deficit by Quarter for 2006 & 2007

The current account improved in the fourth quarter despite a sharp increase in oil imports and the goods and services trade deficit. The decline in these accounts was more than offset by a sharp drop in income payments (profits) on foreign direct investment in the United States. This reflects both the slowdown in the U.S. economy and fallout from the U.S. financial crisis.

Looking at the "current account" muddies the water with "investment flows." This "sharp increase in oil imports and the goods and services trade deficit" is not true.

The oil deficit fell in 2006 & 2007 and was relatively flat in the fourth quarter. Changes in the rate of growth of goods and services balances had different causes. The positive rate of growth of the goods balance was due to a major decline in goods import growth. The growth of the services balance was due to greater growth of services exports than imports.

The U.S. trade deficit with Canada and Europe improved significantly in 2007, but it continued to grow with China and with most oil producing states. In the long run, a sustained reduction in the current account deficit will only be possible with a further, substantial drop in the average, real value of the dollar against currencies that have not yet been allowed to adjust significantly against the dollar. To date, the relative decline in the dollar has been limited largely to sharp drops against major currencies such as the euro and the Canadian dollar. Adjusted for inflation, the dollar is down 32% against a basket of major currencies, but has only declined 13% against the currencies of China and a group of other important trading partners (OITP). Orderly adjustment is unlikely unless China and other Asian countries allow the dollar to fall farther against their currencies.1

Many economists now agree that large U.S. current account deficits are unsustainable in the long term. As the United States finds it more difficult to attract the capital needed to finance its current account deficits, the sharply declining dollar is creating an even harder landing for the domestic economy. Inflows of private foreign capital into the United States fell nearly two-thirds in the 2nd half of 2007. Foreign central banks increased official purchases of U.S. assets by over $100 billion in the fourth quarter in order to stem the dollar's decline.

That ALL economists don't agree is quite stunning. From 1991 through 2006 the trade deficit increase was exponential (see the graph). No exponential increase in anything is sustainable. That that exponential increase was not sustained in 2007 is the beginning of the departure from that exponential increase. The U.S. economy is beginning its collapse.

A substantial and controlled reduction in the dollar of perhaps 40% or more, relative to February 2002, would be the best and most effective way to bring about an orderly reduction in U.S. trade and current account deficits and lower the risks of a financial crisis. This implies an additional dollar fall of 10-15% against the major currencies, on average,2 and 30% against the OITP currencies. It would expand U.S. exports by making exports cheaper, and dampen import growth due to rising prices. China and other foreign governments have prevented this adjustment by intervening in foreign exchange markets to block the fall of the dollar. The risks of an international financial crisis appear to be growing. China must be persuaded to stop manipulating its currency to promote trade adjustment and prevent a deeper financial crisis and recession in the U.S. and world economies.

Note from the data above these articles that, despite a decline in the dollar, there was not greater growth in goods exports in 2007!!! The U.S. is a goods import economy, not a goods export economy. The positive services balance is overwhelmed by the negative goods balance.

Currency manipulation is only one factor of many; correcting that alone will not be enough. For many of the factors, see A Systems Thinking Perspective on Manufacturing & Trade Policy.

Besides, allowing such a reduction in the value of the dollar can be seen, like inflation, as theft from everyone holding dollars.

Even if it would help, a decline of the dollar can't help decrease the deficit with China (our biggest) as long as China and other governments continue to peg their currencies to the dollar.

And persuade China? With the kind of progress in that we've had (see the third graph on "trade" with China at The Trade Deficit and the Fallacy of Composition). Good luck with that. They're waging economic warfare against the U.S., which has unilaterally surrendered. China has no reason to reverse course when they're now in a position to "buy America."

1. See Economic Snapshot,
Moving Toward a Sustainable Dollar, for further details.
2. The dollar has already fallen more than 40% against some major currencies, such as the euro, but is only down 12% against the Japanese yen. If the yen is allowed to catch up to the euro, relative to the dollar, and if similar appreciation of OITP currencies occurs, this may obviate the need for further adjustments by other major currencies.

EPI Article 2:: Moving toward a sustainable dollar

Economic Policy Institute Snapshot for March 26, 2008
Moving toward a sustainable dollar by Robert Scott

The dollar's decline against other currencies is often misunderstood to be a crisis—an understandable mistake, since news reports often describe the result of this process as a "weaker" dollar. In fact, what is happening is a necessary process that restores balance between the dollar's value, which became superheated in recent years, and that of other currencies. This readjustment can carry great benefits for the U.S. economy by helping to reduce unsustainable U.S. trade (i.e., current account) deficits and create a level playing field where U.S-made goods can better compete for market share at home and abroad.

No, it is a crisis. Offshoring has been promoted based on the rationale that consumers get cheaper goods, so stagnant wages don't really matter. Well, as the dollar declines those cheaper goods will come to an end, but wages will have still stagnated and, as more of America is sold off, more of the profits will go to other countries.

As long as China pegs its currency to the dollar, it won't have this effect relative to restoring the balance. Yes, it will further reduce goods imports as prices rise as as the U.S. economy collapses from its multiple problems (stagnant wages, inflation due to a falling dollar, fiscal debt, ...).

Again, the data above these articles shows that, despite a decline in the dollar, there was not a greater increase in goods exports in 2007!!! There are so many ways the U.S. subsidizes offshoring that a decline in the value of the dollar WILL NOT BE SUFFICIENT to "create a level playing field."  

The Federal Reserve tracks three primary indices of the dollar's real, inflation-adjusted value: the broad dollar index, the major currency index, and the other important trading partner (OITP) index. The broad dollar index includes currencies that are freely tradable and are set by markets with little government intervention. This index shows that the dollar has depreciated about 24% since February 2002, when this index last peaked (see chart). Most of this decline is explained by a sharp fall in the dollar against the currencies of our major trading partners, which averaged 32%, as shown in the chart (go to link for chart).

While the major and broad dollar indices have fallen sharply in this period, the current account—which is the broadest measure of U.S. goods, services and income trade—has improved by less than 2 percentage points, as a share of GDP. (See today's Current Account Picture ... above).

Further improvement in U.S. trade deficits are being short-circuited because the dollar shows a much smaller decline against currencies in the OITP index. This index comprises 19 nations that are generally quite a bit poorer than the United States, and many of the included currencies (especially the Chinese yuan, which has by far the biggest weight in OITP) are actively managed by governments to keep their exports competitive in the U.S. market.2 This management is why the dollar has declined so much less against the OITP index than the major currency index—only 13% over the past five years. In addition, the dollar has also fallen only 12% against the Japanese yen since its peak, and most of this decline occurred in 2008.

The countries whose currencies are in the OITP index account for roughly 59% of the current U.S. trade deficit, while countries in the major currency index account for just over 30% (Japan, alone, is responsible for over 10%). Hence, the OITP's relative stubbornness is problematic for United States and global adjustment and makes strengthening currencies in the OITP index and the Japanese yen even more important for correcting the U.S. trade deficit. 

Thinking correcting the dollar relative to OITP index currencies will bring trade balance is a delusion. There are too many other factors. See

  • How the U.S. Subsidizes Offshoring of Jobs
  • A Systems Thinking Perspective on Manufacturing & Trade Policy
  • Why Offshoring is Economically Unsustainable
  • The Trade Deficit and the Fallacy of Composition
  • © 2003 Continuous Improvement Associates

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