| Source: Continuous Improvement Associates http://www.exponentialimprovement.com/cms/dollanddef.shtml Social Issues 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 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, 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 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 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. 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.
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.
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.
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.
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?
Total "Trade" History 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.
The trade deficit, after growing steadily since 1991 (except for the 2001 recession pause), fell somewhat in 2007.
This graph shows that both imports and exports have been growing, but the rate of growth of imports slowed somewhat in 2007.
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.
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.
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: Goods imports and exports both increased in 2007, but it's apparent that goods import growth slowed 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.
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: $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.
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. Services: Both services imports and exports increased faster in 2007 than in 2006.
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.
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: $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.
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?
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.
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.
Balance: 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.
Articles Illustrating a Lack of Understanding of What's Happening Statements on which I comment are bolded. Samuelson: Marching Backward on Trade Marching Backward on Trade By Robert J. Samuelson 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.
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.
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.)
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.
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.
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 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.
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.
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.
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.
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.
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 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 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.
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
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.
Notes Economic Policy Institute Snapshot for March 26, 2008 The dollar's decline against other currencies is often misunderstood to be a crisisan 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.
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 accountwhich is the broadest measure of U.S. goods, services and income tradehas 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 indexonly 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. © 2003 Continuous Improvement Associates Top of Page |
