The US trade deficit for June, as reported by the Commerce Department last week, jumped to a record $55.8 billion. The19.1% rise was significantly higher than most people had anticipated. It was the seventh increase in eight months, not exactly something to write home about. The country’s trade deficit with China was a record $14.2 billion, about 17% more than in May. Imbalance with the expanded 25-nation European Union was $10.6 billion, while the trade deficit with Japan climbed to $6.3 billion.
June’s deficit was in marked contrast in size to the “normal” export-over-import gap, which has customarily ranged between $30 and $40 billion per month over the past several years. Both exports and imports played a role in creating the June deficit. American purchases of international goods and services climbed some 3.3%, while exports of US products (which had risen 2.7% in May) declined approximately 4.3%. The drop was the sharpest decrease since the month of 9/11.
Imports, which increased $4.7 billion over May to reach $148.6 billion, were concentrated in industrial supplies and capital goods, signaling strong corporate spending. That, of course, is not a bad thing at all.
Petroleum also had a dramatic impact on the deficit. The price per barrel of oil rose to $33.76, a 1.9% hike over May and the highest monthly average price since March 1982. The US purchase of 1.7 million barrels a day at this amount accounted for $1.8 billion of the added trade imbalance. With prices continuing to rise in the interim, this part of the deficit is not likely to moderate. We purchase more than 80% of oil from foreign sources, thus pretty much leaving this part of the shortfall out of our control in the near term.
On the export side, almost all categories had noticeable drops, with the greatest weaknesses seen in capital goods, consumer goods, agricultural products, industrial supplies, and automobiles. Exports of civilian aircraft fell by a third. Higher oil prices are taking their toll on our major trading partners, who have not yet seen the same level of overall economic momentum enjoyed by the US.
For the first quarter of 2004, the US trade deficit was $144.9 billion, about 5% of the gross domestic product. The trade imbalance for the first six months of 2004 was $287.7 billion, well ahead of last year’s report for the same timeframe of $248.8 billion. You can rarely put much stock in a single economic number, but these numbers are big enough and have lasted long enough to be a source of concern.
I should point out, however, that the monthly trade gap will probably narrow later this year with expansion abroad stimulating exports and some moderation in uncertainty bringing modest reduction in oil prices. Nonetheless, 2004 will be a record year by a wide margin.
Over a more extended time horizon, there are some fundamental things we can do to reduce the magnitude of the deficit (though the very structure of the global economy probably prevents us from eliminating it entirely). First, we can become more energy independent. There are initially two ways to do this. One, typically favored by Republicans, is to increase domestic petroleum production; the other, often advocated by Democrats, is to develop significant sources of alternative energy. The answer is quite simple. Assuming we can do so in an environmentally sensitive manner (and we can), we need to do both.
The other major thing we can do is to continue and intensify our efforts to open up markets to US goods. At present, it is relatively easy to import into this country (as it should be), but many parts of the world are restricted with regard to our exports. Our competitive advantage lies in high-tech, high value-added goods and services, and it is imperative that we be able to sell them on a global scale. (Although they don’t all realize it, it’s good for our trading partners as well.)
In summary, the ebb and flow of world markets is now working against us in terms of trade deficits. This is a fact of life at the moment and certainly something an economy of our size can deal with. On the other hand, there are underlying structural conditions which we can positively and definitely impact. The monthly number garners the headlines, but the long-term pattern is where the action is.