An Improving Trade Picture

A weaker dollar and more domestic energy production are taming the U.S. trade gap.

Milton Ezrati of Lord AbbettThis country’s balance of international trade just keeps on improving. Long in deep deficit, which is frequently considered a sign of fundamental economic problems, the United States’ tendency to import more than it exports persists. But the trade deficit has nonetheless narrowed considerably of late. Part of the improvement reflects the currency, for the dollar, though up recently against the euro, has fallen long term against almost all other currencies, relieving American producers of a long-standing pricing disadvantage. Part of the improvement, and the factor that has dominated most recently, stems from the new fracking technology for natural gas and oil extraction and its impact on petroleum imports. This favorable influence promises to become still more dominant in coming years.

Overall, the global economic slowdown and the disappointing pace of expansion in this country have slowed the growth of both exports and imports. Until recently, both seemed to boom with the economic recovery, anemic as it otherwise was. Between mid-2010 and mid-2011, the country sucked in almost 13% more imports of both goods and services, while the rest of the world bought about 14% more from the United States. But in the 12 months from mid-2011 through June, the most recent month for which complete data are available, exports have expanded barely over 7%, while imports have grown just 2.2%. The imbalance of imports over exports has shrunk from a monthly deficit of $50.3 billion in June of 2011 to $42.9 billion this June, an improvement of almost 15%.

Though the dollar has gained in value against the euro recently, the more relevant influence on trade has been its longer-term decline against the euro and most other major currencies. Even with its recent losses, the euro’s overall gain against the dollar over the last 10 years verges on 30%. Japan’s yen has risen almost 40% and China’s yuan almost 25%. By making the dollar cheaper globally, these currency moves have made American products much more affordable to foreign buyers. By making other currencies more expensive, these same currency moves have made foreign products dearer to those with dollar incomes, that is, Americans. The net impact has brought more foreign buying to American-based producers and persuaded more Americans to buy at home. To be sure, the euro’s 5.7% decline since last spring has undone some of this effect, but even now, according to the International Monetary Fund, the euro is not especially cheap, at least relative to European production costs, while Japan’s yen, still near all-time highs, remains remarkably pricy.

More recently, an even more fundamental difference has factored into this country’s trade equation. Fracking technology has given Americans cost-effective access to domestic petroleum resources, mostly natural gas, that once seemed inaccessible. By reducing the need for imports, this advance has begun to address the biggest single factor keeping this country’s foreign trade account in deep deficit. The change has appeared dramatically in just the last 18 months of data. According to the Commerce Department, overall petroleum exports during this time rose 25.3%, while imports dropped 8.3%. The role of fracking is more evident in finer levels of detail. Though crude oil imports, mostly for the distillation of gasoline, have risen 3.3% year to date, imports of natural gas have dropped nearly 70%, while imports of liquefied petroleum products, again mostly natural gas, have declined more than 30%. And as cheaper domestic natural gas has convinced families and businesses to switch from oil heat, imports of fuel oil have also dropped, by almost 6%.

Looking forward, there is always a chance that dollar strength will turn pricing against American producers once again. Though not probable, it is possible. But even if the dollar were to gain a lot of ground, it has depreciated so far against most currencies that it would take quite a move to reverse the present American pricing advantage. Even the recent dramatic drop in the euro’s value against the dollar has failed to erase that advantage entirely. And even if a dramatic move were to turn pricing against American producers, it would take months, possibly years, to unwind trade relationships built up over the long time that Americans have had some advantage, relationships that have only begun to tell during the last few years.

Meanwhile, the petroleum situation should continue to help reduce the trade deficit. Already the shortfall between petroleum exports and imports has narrowed from about half the country’s overall trade deficit to some 39%. As the availability of domestic natural gas increases, especially as technology erases some of the environmental concerns, it will have a still greater fundamental impact. No one expects the overall trade balance to swing into surplus any time soon, much less the balance on petroleum products, but, in general, the clouds overlaying this longer-standing area of anxiety seem set to continue lifting.

 

 

About the Author

Milton Ezrati

Milton Ezrati

Milton Ezrati is senior economist and market strategist for Lord Abbett & Co. and an affiliate of the Center for the Study of Human Capital and Economic Growth at the State University of New York at Buffalo. His latest book, Thirty Tomorrows, linking aging demographics and globalization, will appear next summer from Thomas Dunne Books of St. Martin’s Press. See more of his articles about the economy here.

 

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