Deficit in the Trade Story

The numbers are in and we hit another record trade deficit in July. What is interesting to me is not so much the deficit but the AP news story about it. The story is okay as far as it goes, but what troubles me is where it doesn't go.

First, we are given lots of numbers defining the absolute size of the trade deficit but this really isn't what is important. What we really need to know is what is the size of the trade deficit relative to GDP. Because GDP is always increaseing, we will frequently be setting new trade defict figures. The question is, is the deficit growing faster or slower than GDP?

Second, the article goes into the sources of the trade deficit and mentions the usual suspects (oil prices and China), but never mentions the real culprit, i.e., the Capital Account. This is the flow of capital into and out of the country and, almost by defintion, it is the opposite of the Current Account which includes the trade deficit. A $776 billion trade deficit implies that there is roughly a $776 Billion surplus in the Capital Account which means that foreign investors have invested $776 billion more in the US than US investors have invested overseas.

The question is, are they buying US stocks and private bonds or are they buying Treasury Bills? If they are making private investments, that just means the US economy is a good risk. However, it is more likely that they are buying the ever increasing quantituy of T-Bills taht the US is issuing to float our government budget.

There can be no doubt that a significant source of the trade deficit is our own budget deficit. But you alsmot never see thsi in the US news.

Trade deficit hits $68B record in July
By MARTIN CRUTSINGER, AP Economics Writer
http://news.yahoo.com/s/ap/20060912/ap_on_bi_go_ec_fi/economy

WASHINGTON - The U.S. trade deficit hit a record $68 billion in July as surging global oil prices pushed America's foreign oil bill to the highest level in history.

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The Commerce Department reported Tuesday that the July deficit jumped 5 percent from the June imbalance. Analysts had expected the deficit to worsen slightly, but the overall imbalance was worse than expected and surpassed the old monthly record of $66.6 billion set last October.

So far this year, the deficit is running at an annual rate of $776 billion, putting the country on course to rack up a record annual deficit for the fifth straight year. Democrats, campaigning for control of Congress in the November elections, hope voters will view the soaring trade deficits as evidence that President Bush's trade policies are not working.

For July, U.S. exports, after setting a string of records, edged down 1.1 percent to $120 billion — still the second highest level in history. Sales of American jetliners, computers and food products all slipped.

Imports rose to a record high of $188 billion, an increase of 1 percent from the June level. America's foreign oil bill climbed 4.8 percent to an all-time high of $28.5 billion, reflecting record oil prices in July.

The politically sensitive deficit with China did decline slightly in July to $19.6 billion but is still on track to far exceed last year's $202 billion deficit, the highest ever recorded with a single country.

Treasury Secretary Henry Paulson will leave later this week for an Asian trip that will take him to China for his first meetings with Chinese economic officials since he joined the Bush's Cabinet in July.

The administration is pushing China to move more quickly to allow its currency to rise in value against the dollar as a way to narrow the yawning trade gap by making American exports cheaper in China and Chinese goods more expensive for U.S. consumers.

Congressional critics of China's trade policies have warned that if China does not act, they plan to push for a Senate vote before the end of this month on legislation that would impose 27.5 percent penalty tariffs on all Chinese imports.

That would drive up the price American consumers would have to pay for Chinese clothes, toys and consumer electronic products, but supporters of the legislation contend a strong U.S. response is needed to force China to stop manipulating its currency to gain unfair trade advantages.

The big jump in America's oil bill reflects the sharp rise in global oil prices. The average price for a barrel of imported crude oil rose to a record of $64.84 in July while the spot price in global oil markets surged even higher to $77 per barrel.

However, since setting a record in mid-July, crude oil prices have come down by about 13 percent, raising hopes that the trade deficit will start to improve in coming months.

American exporters have been helped by a decline in the value of the U.S. dollar against many major currencies and an improved economic outlook in Europe and Japan.

The drop in exports in July was led by a $1.2 billion decline in sales of U.S. capital goods, reflecting declines in shipments of civilian aircraft, computers and computer accessories and industrial machinery.

While the deficit with China narrowed slightly, America's trade deficit with Japan rose by 8.1 percent in July to $7.6 billion.

The deficit with Canada, America's biggest trading partner, edged up to $5.9 billion while the imbalance with Mexico narrowed to $5.1 billion. The deficit with the 25-nation European Union jumped to $13.4 billion, up from $9 billion in June.