Is the U.S. Headed for a Trade Surplus?

The weaker dollar and fracking are among the factors reversing the decades-long deterioration in the U.S. trade balance.

Milton Ezrati of Lord AbbettCould it be that the U.S. trade balance is headed into the black? At first blush, the prospect seems dubious. This country’s trade deficit has drifted deeper into the red for so many decades now that few that can even conceive of lasting improvement. Even so, that is what seems to be in store. The gap between what this country buys from the world and what it sells has already narrowed considerably and shows every indication of continuing to do so, because of currency shifts and more fundamentally because of alterations in China’s and Japan’s economies and the remarkable turn in the mix of global energy production.         

The old, depressing trade patterns had persisted for so long they seemed immutable. They remain an underlying assumption in just about all economic, financial and currency analyses. And such a default to deficit is understandable. The U.S. trade position deteriorated, almost uninterrupted, for better than 60 years. In 1947, the United States sold the world $10.1 billion more in manufactured goods, minerals and other physical products than it imported, a surplus of more than 4% of that year’s gross domestic product (GDP). By 1960, the positive gap had shrunk to $5.3 billion, a mere 1% of that year’s GDP. The balance slipped firmly into the red in 1974. By 1984, the deficit had widened to almost $111 billion, 2.8% of GDP, and by 1994, it averaged almost $685 billion, fully 5.8% of GDP. By 2006, it stood at $860 billion, a whopping 6.4% of GDP. It was not a pretty nor encouraging picture.

Contributing still more fundamentally to this turn are domestic policy changes in China and Japan. Japan’s population has already aged to the point where one in five is above retirement age. Though Japanese business has partially adjusted to the circumstance, the aged population simply makes it impossible for the country to continue its former role as the workshop of the world. Meanwhile China, which does not yet have Japan’s demographic problems, has begun to re-orient its development policy away from its former, almost exclusive emphasis on exports. Though the country remains a fierce global competitor, particularly when it comes to cheaper consumer goods, the new, additional focus on domestic development will continue to open China’s door wider to imports, particularly of American-made equipment. Since Japan and China constitute more than half of the total U.S. trade deficit, those changes have contributed, no doubt significantly, to the favorable turn in trade and will likely continue to do so.

Still more fundamental in this turn is the so-called fracking revolution in hydrocarbon extraction. It promises to increase global production of fossil fuels so markedly that falling oil and gas prices will cut the expense for this major U.S. import. But fracking, by increasing domestic American hydrocarbon supplies, also will eliminate this country’s need to import the volumes it has in the past. The introduction of this technique has already reduced U.S. fuel oil imports almost 5% from the comparable period in 2011. It has cut crude oil imports 2.4%. With natural gas, where fracking has had its biggest effect, imports have dropped almost 40%. Meanwhile, petroleum exports have risen almost 11%. The overall trade deficit in fossil fuels, fully 40% of the entire U.S. trade deficit, has improved by more than 8%. What is more, the effect should build going forward as the economy takes fuller advantage of its new fuel supplies, particularly of natural gas. In time, the United States should become a net exporter of liquefied natural gas and perhaps oil.

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