Early Friday, the Department of Commerce reported that January's trade deficit expanded once again, this time by $2.6 billion to $58.3 billion. The deficit reached a record high last November, when it hit $59.4 billion, and the January figure is actually the second-largest to date.
Moreover, Wall Street analysts had expected the trade gap to increase only to about $56.5 billion, given the current foreign exchange rate. A weaker greenback makes U.S. exports less expensive and thus more competitive overseas, so the logic was that with the dollar getting weaker against major currencies, U.S. exports would expand too. At the same time, foreign goods entering the U.S. market would become more expensive to U.S. consumers, which would make foreign goods less attractive to domestic buyers.
But while exports increased by 0.4 percent in January to $100.8 billion, and imports increased even more, rising 1.9 percent to reach an all-time high of $159.1 billion.
"Our insatiable demand for consumer goods and motor vehicles is what drove the large increase in imports," said Joel Naroff, chief economist at Naroff Economic Advisors. "With growth solid in the (United States), imports demand just keeps rising, but slower growth elsewhere is keeping export gains down," he added.
Indeed, even as consumer spending within the United States continues to grow steadily in light of the solid economic rebound, one major problem is that other countries aren't doing as well as the United States, so the overseas market is not as strong as the domestic one. For instance, exports to China, with which the United States has had the biggest trade deficit, improved slightly in January, as U.S. exports to the country reached $3.3 billion. However, Chinese imports to the U.S. shores reached $13.2 billion, especially as the Chinese yuan remains weaker against the greenback as its exchange rate is fixed to the U.S. currency.
"With the dollar declining, it was expected that exports would surge. They are not, and part of the problem is that U.S. firms are increasing prices rather than going all out to get market share. That is a short-term profit maximization philosophy that will not leave the country or the firms in a whole lot better shape than before the dollar decline," Naroff warned.
So even as the dollar has fallen an average of 15 percent against all currencies since January 2002, and weakened 27 percent against the currencies of major industrialized nations including the euro, the trade deficit has not benefited from such steep devaluation. Furthermore, the dollar has actually gained about 2 percent against the Chinese currency, as the yuan remains pegged at 8.28 to the dollar.
Other analysts, meanwhile, pointed out that U.S. consumers continue to be attracted to foreign goods on the one hand, and overseas companies are more cost-efficient than their U.S. counterparts on the other.
"The fall of the dollar against the euro and yen are not reducing the trade deficit. Americans continue to buy Japanese and German cars even if those cost more, and German and Japanese automakers can accept narrower profits to defend market shares. Also, Korean cars are increasingly viewed as acceptable alternatives to lower-end and middle-range Japanese cars," said University of Maryland's economic Professor Peter Morici.
As for U.S. trade with China, Morici argued that the Chinese government has worked hard to keep its currency weak in order to maintain China's competitive edge in global markets, and has actively bought dollars and sold off yuan to do so.
"China's purchases of dollars create a 33-percent subsidy on its exports, and having a devastating effect on U.S. workers ... were foreign governments to stop manipulating currency markets, the (U.S. trade deficit) would be cut in half," Morici said.
Yet other analysts criticized not just the current foreign exchange regime, but also U.S. trade agreements with emerging markets.
"America's chronic, enormous trade deficit is the inevitable result of 15 years of (North American Free Trade Agreement)-like trade agreements with low-income countries," argued Alan Tonelson, a research fellow at the Washington-based U.S. Business and Industry Council.
But whatever the cause of the continued rise in the U.S. trade deficit, it seems likely that U.S. consumers will continue to buy up overseas goods while demand for U.S. goods abroad is unlikely to surge despite the steady fall in the dollar's value.
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