U.S. TRADE DEFICIT - FIRST HALF 2002
Brief decline in the deficit ends
The U.S. merchandise trade deficit moved back into record-setting
territory in the first half of 2002, after only one year
of recession-induced decline. The deficit set new records
in April and May; and June’s deficit was the second
highest in history (behind May’s new record). The second
quarter jump sent the total deficit for the first half of
2002 to $222.1 billion, up from $212.1 billion in 2001, and
on pace to break the full year record of $436.1 billion set
in 2000.
The increase in the overall deficit came in spite of a significant drop in the deficit in mineral fuels, from $63.2 billion for the first half of 2001 to $47.0 billion this year. But with oil prices increasing in each month through June, it is quite likely that oil trade will begin adding to the growing deficit in the second half of the year, instead of shrinking it. The 10 percent increase in the manufactured goods deficit, from $174 billion last year to $192 billion through June of this year, provides a better indicator of how much the full year deficit will grow.
Both U.S. imports and exports through June were lower than in the similar periods of 2000 and 2001. Last year’s recession cut U.S. purchases from abroad, while demand for U.S. products in other countries suffered due to slowing foreign economies. Their slowdown was caused, in part, by falling U.S. demand for their exports. The uptick in the U.S. economy this year has caused U.S. imports to recover sharply, while continuing slow growth abroad has limited the improvement in U.S. exports. Even with the pickup in the second quarter, U.S. exports for the first half of 2002, at $342.7 billion, were a bit lower than for the second half of last year. Imports for the first half of this year, at $564.7 billion, were up 3 percent from the previous six months. The U.S. economy’s strong dependence on imports means that even if the U.S. and foreign economies grow at the same pace, the U.S. deficit increases.
Strong U.S. sales of imported motor vehicles pushed the auto trade deficit through June to a record high of $59.7 billion, an increase of $2.5 billion. Larger deficits with Japan, Mexico, Korea and the U.K. more than compensated for smaller deficits with Canada and Germany.
Country results vary
U.S. deficits for the first half of 2002 increased with the
European Union (by $7.4 billion, or 26 percent), Mexico (by
$3.8 billion, or 26 percent), and Germany (by $1.1 billion,
or 8 percent). While both exports and imports with these
countries declined, the U.S. deficit with China grew by $6.0
billion, 16 percent, on the strength of a $7.1 billion increase
in U.S. imports; small surpluses with the U.K. and Brazil
have turned into deficits.
Impact of high tech swoon persists
The weakness in U.S. and international business investment
is very visible in the trade data. Trade in capital goods,
which includes the mechanical and electronic machinery and
other equipment that make up the bulk of investment spending,
accounted for more than 70 percent of the decline in U.S.
exports so far this year, and for 60 percent of the drop
in imports. U.S. exports of metalworking machine tools, for
instance, fell by 21 percent and imports fell by 32 percent.
Some of the products that form the backbone of high-tech
infrastructure, computers and accessories, telecommunications
equipment and semiconductors, combined to contribute $15.1
billion to the decline in U.S. exports and $9.4 billion to
the drop in imports.
What happens to U.S. trade deficits during recessions?
In past recessions, the trade deficit has fallen substantially.
Excluding trade in fuels, which is affected by cartel pricing
and weather-related heating and cooling demands as well as
by the state of the economy, during the recessions in the
mid-1970s and early 1980s, the U.S. trade balance became
positive. In the early 1990s, the deficit fell by two-thirds,
to only $25 billion. In contrast, last year’s recession
had a very small and brief impact on the trade balance, pulling
the non-fuel deficit down by only 4 percent, from $314 billion
to $301 billion.
Will new trade agreements solve the trade deficit?
With the passage of Fast Track trade promotion authority
in June, the Bush Administration will be rushing to finish
ongoing negotiations to create free trade agreements with
Chile and Singapore, speed up the pace of the negotiations
on a Free Trade Area of the Americas (FTAA, covering all
of the Western Hemisphere except Cuba) and the WTO’s
Doha Development Agenda (both are scheduled to be completed
by 2005) and initiate talks with five Central American countries
and Morocco. The Administration claims that the U.S. is “behind”
other countries in reaching such agreements and is losing
out on important markets for U.S. products.
For the Administration’s position promoting free trade to be accurate, agreements reached in the past should have produced improved trade balances with affected countries. The most important trade agreements completed recently were the North American Free Trade Agreement (NAFTA) and the WTO Uruguay Round agreement, which covered nearly all countries. Since NAFTA went into effect in 1994, the U.S. trade deficit with Canada and Mexico has soared, from $9.1 billion to $83.2 billion. Since the 1995 implementation of the WTO agreement, the worldwide U.S. deficit has tripled. These figures speak for themselves. The kind of trade agreements that the Bush Administration is hoping to negotiate will only worsen an already serious economic problem for American workers – job-displacing imports and intensified international competition for jobs and investment that depresses wages, benefits and working conditions for workers in the U.S. and abroad.
What’s ahead?
While it is difficult to predict the course of the U.S. trade
balance for the rest of the year, it is possible to identify
the major near-term economic forces that will affect it.
Pushing in the direction of a higher U.S. deficit would be
stronger U.S. growth, weaker foreign growth and a strong
exchange rate for the dollar. The opposite of these trends
would help to shrink the trade deficit. In recent months,
the U.S. economy has looked weaker than earlier in the year.
The decline in the value of the dollar has not gone nearly
far enough to make a significant impact on the high prices
of U.S. exports or the low prices of imports. There seems
to be little economic vitality abroad that would stimulate
U.S. production for export.
That leaves the U.S. economy, especially manufacturing industries, on shaky ground and the U.S. trade numbers changing very little. So, right now, it looks like the merchandise trade deficit for 2002 will be higher than last year and in the vicinity of the 2000 deficit.
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