Trade Deficits?

The NYT’s Floyd Norris looked at the US Trade Gap this weekend; He was not pleased with what he found:

"New figures on the United States budget and trade deficits this week showed that it is the trade deficit that is plunging to unprecedented depths . . . Expressed as a percentage of the gross domestic product, the trade deficit for the 12 months through October hit 6.1 percent. Only three years ago it was 4 percent, a figure that then seemed huge and unsustainable . . .

But the trade deficit is much larger than it ever was during the Reagan administration. There was much hand-wringing then as the trade deficit approached 3 percent of G.D.P. – half the current level – and governments of the major industrialized countries engineered the Plaza Accord, which brought down the dollar and, in time, the trade deficit.

In 2005, the dollar has surprised nearly everyone with its strength against the major industrialized countries, and what may be the most important exchange rate of all, the dollar versus the Chinese yuan has been allowed by the Chinese government to adjust only a small amount.

Notwithstanding talk about the decline of America’s manufacturing strength, the level of exports has remained relatively high. In recent decades, exports as a proportion of G.D.P. have fluctuated from 5 percent to 8 percent. The latest 12-month figure, 7.2 percent, is closer to the top than the bottom of that range.

But what has changed is the value of imports. During the Reagan years, they never hit 9 percent of G.D.P. Now they are above 13 percent. It is hard to see how the trade deficit will improve without a fall in imports, something that is most likely during a consumer recession."

Quite astonishing. If outsourcing can be described as Labor Arbitrage, who then shall w edescribe this enormous trade imbalance? In many ways, it is a Living Standard arbitrage. We are buying goods and services on with mostly borrowed money, while others sell us their wares by extending us that credit.

Courtesy of Ludwig von Mises Institute

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Incidentally, Norris has some positive things to say about the Budget deficit in the column.

Here’s the NYT graphic, but I prefer the one above, via the Ludwig von Mises Institute: 

Graphic courtesy of NYT

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Sources:
Budget Deficit Getting You Down? Just Take a Look at the Trade Gap
FLOYD NORRIS
NYT, December 17, 2005
http://www.nytimes.com/2005/12/17/business/17charts.ready.html

Do Trade Deficits Matter?
John Mauldin
December 16, 2005
http://www.frontlinethoughts.com/article.asp?id=mwo121605

Chart Source:   Ludwig von Mises Institute Historical series is from International Historical Statistics, The Americas 1750-1993, 4th Edition by B. R. Mitchell; graph is taken from Pakko, M. R., The U.S. Trade Deficit and the "New Economy," in: Federal Reserve Bank of St Louis, September/October 1999, pp. 13.