The Untold Story of the U.S. Trade Deficit: Rising Exports
The U.S. trade deficit grew to $497.8 billion in 2010, but that number is actually somewhat deceptive. In fact, the nation's manufacturing sector posted significant continued export gains last year. These were obscured, however, by two longstanding problems: America's imported oil bill and its large trade deficit with China.
Aided by rapid growth in emerging markets -- which need U.S. industrial goods to develop their business and residential infrastructures -- the nation's manufacturing export uptrend will continue in 2011, and probably well beyond. That could eventually create a trade surplus, if the U.S. can decrease its imported oil bill and come to a more even trading relationship with China.
Still Importing Too Much Oil
The petroleum deficit, which jumped 29.6% to $256.9 billion in 2010, reflects America's longstanding high per-capita consumption of both heating oil and gasoline, and the nation's inability or unwillingness to move assertively toward an alternative transportation fuel.
Given the strong probability that oil's price will remain high -- well above $70 per barrel -- the imported petroleum bill is likely to continue to be a drag on the trade numbers, barring a breakthrough in energy technology or a sudden and fervent conservation movement among U.S. motorists.
Of 2010's $256.9 billion petroleum deficit, the net bill for crude oil -- which is used to make gasoline -- totaled $250.7 billion, up 33.4% from 2009. The jump was largely price-based: The volume of oil imported rose only slightly, by 1.9% to an average of 9.25 million barrels per day (bpd). The average price per barrel, though, surged 31.1% to $74.66 per barrel in 2010 from $56.93 in 2009.
To put that in perspective, in 2010 crude oil imports accounted for $20.9 billion a month out of an average monthly trade deficit of $41.5 billion. If the U.S. ended its dependence on imported oil, the trade deficit would be cut in half.
China Still Benefits from a Fixed Yuan
America's trade imbalance with emerging market giant China represents its other key weakness in international commerce.
In 2010, the U.S. trade deficit with China jumped to a record $273.1 billion, up 20.4% from $226.9 billion in 2009.
The red ink with China wasn't due to a lack of growth in U.S. exports to the world's most populous nation: They leaped an impressive 32.2% to $91.9 billion from $69.5 billion in 2009. But U.S. exports to China started from too low a base to offset the 23.1% increase in U.S. imports from China, up $68.7 billion to $364.9 billion. Even out the deficit with China, and the U.S. monthly trade deficit would shrink by another $22.8 billion per month.
At least some part of the China-U.S. imbalance can be attributed to the artificially undervalued yuan, which China holds in a thin, fixed band, presently set at about 6.6 yuan to the dollar. This boosts China's exports by keeping its goods priced lower than they would be if the currency's value was determined by the free market.
Add the China deficit and the oil deficit together, and it's clear: If the U.S. could solve those two problems, the nation would be running a roughly $3 billion monthly trade surplus, instead of the current monthly average deficit of $41.5 billion.
An Industrial Export Rebound
The real story in the international trade arena is the U.S. manufacturing sector's ongoing impressive export performance.
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Led by increases in industrial equipment, capital goods, civilian aircraft, supplies and autos, exports of U.S. goods increased by by 20.8%, from $1.07 trillion in 2009 to $1.29 trillion in 2010. Products such as electric utility generators produced by General Electric (GE), commercial airplanes manufactured by Boeing (BA), and tractors and other agriculture equipment produced by Caterpillar (CAT) and Deere (DE), among other heavy-industrial equipment, were at the forefront of the uptrend.
After bottoming out with a monthly total of $84.2 billion in January 2008, during the financial crisis' acute stage, goods exports have risen essentially continuously for two years, and totaled $116.6 billion in December 2010. Given strong GDP growth in the industrial goods purchasing nations of China, India and Brazil, among others, the rising U.S. manufacturing export trend will extend through 2011, and probably for considerably longer.
It's also worth noting that the strong international performance by U.S. manufacturers occurred in advance of the full implementation of President Obama's National Export Initiative, which is aimed at doubling U.S. exports by the end of 2014. Doubling U.S. exports in three years is a long shot, but the initiative should provide an additional boost to exports, due to the program's increased marketing of U.S. goods and services in foreign countries, among other benefits.
Two Challenges Worth Conquering
Of course, the twin impediments preventing the U.S. from reaching a trade surplus won't be easy to correct.
Regarding China, it will take continued international pressure, not just efforts by the U.S., to encourage Beijing to let its currency appreciate faster. Naturally, China takes a different view of its fixed-band yuan exchange and the trade situation, arguing that it needs to keep the yuan at a low value to protect its embryonic industries. Although Beijing has indicated it plans to let the yuan appreciate slowly, policymakers in Beijing suggest that the best way for the U.S. to reduce its trade deficit with China is for the U.S. to consume less and save more.
Concerning imported oil, the efficiency of America's automotive fleet has improved significantly over the past 30 years, but additional gains from hybrid vehicle technology, engine improvements, lighter materials and the increased use of natural gas, as well as an increase in the use of mass transit, will be needed before U.S. oil imports decline in a sustained way.
These are daunting tasks, but the benefits of success are more than worth the effort. Every month, the trade deficit sends billions of dollars in U.S. wealth abroad. A trade surplus would keep that money at home, increasing the pool of funds available for investment and business expansion.
Half-a-trillion extra dollars a year available for investment and business expansion wouldn't guarantee a thriving economy with expanding job opportunities -- but it would be a good place to start.
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