U.S. Trade Deficit Hits All-Time High

The U.S. trade deficit ballooned to an all-time high of $617.7 billion last year, pushed by soaring oil prices and Americans' insatiable appetite for everything foreign, from cars to toys and food.

The Commerce Department reported Thursday that the 2004 imbalance rose 24.4 percent from the previous year and marked the third year in a row that the deficit had set a record. The imbalance with China swelled by 30.5 percent to $162 billion, the highest ever with any country.

For December, the deficit actually shrank. But at $56.4 billion, it still was the second worst monthly showing ever, down 4.9 percent from $59.3 billion in November.

Democrats said the figures were evidence that President Bush's policy of seeking trade deals was not working. They said the 2.7 million manufacturing jobs the United States has lost over the past four years reflect in large part unfair trading practices by China and other countries.

Sen. Byron Dorgan, D-N.D., said the report was "devastating news for the American economy." House Democratic leader Nancy Pelosi of California said the deficits were undermining the U.S. manufacturing base.

Added John Sweeney, the AFL-CIO's president: "America is losing good jobs due to bad trade deals."

Sen. Charles Schumer, D-N.Y., said the imbalance with China showed the need for his legislation that would impose across-the-board tariffs of 27.5 percent on Chinese products unless Beijing stopped tightly linking its currency, the yuan, to the U.S. dollar.

American manufacturers says this policy has undervalued the yuan by as much as 40 percent, giving Chinese companies a huge competitive advantage.

Treasury Secretary John Snow told Congress on Thursday that he believed the administration's efforts to prod China to develop a more flexible currency system were bearing results.

America's major trading partners, he said, had to grow faster and the United States must work to boost national savings in order to dampen excess demand that is being met by foreign goods.

"It sure would be helpful if Japan and our other trading partners would grow faster," Snow said.

Private economists said the country's low savings rate was worsening because of the government's record budget deficits. They predicted the trade deficit for 2005 would set a record, but that the deterioration would begin to slow and lower deficit would result in 2006.

"The nation is hemorrhaging red ink and we are seeing the worst of it right now," said Mark Zandi, chief economist at Economy.com. "The trade deficit should stabilize this year and with a little bit of luck, it should start to improve in 2006."

For all of 2004, U.S. exports of goods and services rose 12.3 percent to $1.15 trillion. But imports rose at an even faster clip of 16.3 percent, setting a record of $1.76 trillion.

The demand for foreign goods was led by a 35.7 percent surge in foreign petroleum imports, which climbed to a record $180.7 billion. The increase reflected not only higher demand but also surging prices. For the whole year, the average per barrel price for imported crude was $34.47, compared with $26.98 in 2003.

Imports of foreign autos, industrial supplies and consumer goods all set records. So did imports of food products, which climbed to $62.17 billion.

U.S. exports of food products reached a record $56.3 billion. But because U.S. shipments abroad were lower than imports, the country recorded a $5.9 billion deficit in food. It was the third straight annual deficit in agriculture, which had been an important source for helping narrow the deficit in manufactured goods.

U.S. exports did climb to an all-time high. Shipments of U.S. food, autos and consumer goods set records, helped by a 15 percent decline in the value of the dollar over the past three years. A weaker dollar makes U.S. products cheaper and thus more competitive on overseas markets.

The deficit with China was up from a record of $124.1 billion. The United States also saw large increases in the deficits with Japan, at $75.2 billion, Canada at $65.8 billion and the 25-nation European Union, where the deficit rose to $110 billion.

New Trade Deficit Figures Turning US Economy into a Disaster Movie
Alan Tonelson
Friday, February 11, 2005

This week Washington issued a report on America’s trade performance that only an Irwin Allen could love. You remember Allen, right? The master of 1960s and 1970s cinematic extravaganzas like “The Towering Inferno”and “The Poseidon Adventure”? Well, the year-end 2004 trade figures published on Feb. 10 by the Department of Commerce are the economic equivalent of a disaster movie.

New records were set all over the place – but not the kind any well-run economy would seek. The overall 2004 U.S. trade deficit (goods and services) hit a record $617.7 billion, shattering last year's record of $496.51 billion by a staggering 24.4 percent. In yet another new record, the deficit’s share of the U.S. economy jumped from 4.5 percent in 2003 to 5.3 percent in 2004.

Total exports of goods and services rose $125.6 billion to $1.146 trillion, an increase of 12.3 percent. Could this be a sign that the dollar’s recent weakness against most major currencies is finally giving U.S.-made goods a price advantage in world markets? Maybe. But why, then, did total imports of goods and services rise $246.9 billion (roughly twice the export increase) to $1.764 trillion, an increase of 16.28 percent? Why didn’t this price advantage seem to matter much at home, where imports continued to eat into domestic producers’ sales and employment?

Many analysts put much of the blame on oil, and the final 2004 figures clearly show that America’s addiction to oil imports continues to intensify. The oil trade deficit worsened by a stunning 36.21 percent last year, to $164 billion, reflecting not only increased volume imports but much higher prices. Yet the non-oil goods deficit rose 18.35 percent – a hefty gain – and is nearly three times larger. Clearly, America's trade problems are much more than an oil problem.

To no one’s surprise, the U.S. deficit in manufactures continued to soar, increasing 17.6 percent in 2004, from $469.45 billion to $552.06 billion. 2004 exports did rise $65.49 billion, or 11.4%, to $623.44 billion. The weak-dollar effect again? Again, maybe. But again, seemingly beside the point, as the much larger volume of imports increased by $148.1 billion, or 14.42 percent, to $1.176 trillion.

Since manufactures dominate U.S. trade flows, new confirmation that imports not only dwarf exports but are rising considerably faster underscores a critically important message: With one exception, neither the weak dollar nor any other touted hope or strategy has a prayer of restoring sustainability to America’s international accounts. And the one exception is a deep, prolonged economic downturn.

Certainly, no one should look to the service sector to rebalance the trade flows. Services are almost universally trumpeted as not only the inevitable future of the American economy, but its best hope for future prosperity. The longstanding U.S. services surplus, however, is rapidly becoming history. Between 2003 and 2004, this surplus shrank by just over five percent, with imports growing about one third faster than exports. More disturbingly, the decline of the service sector surplus since 2002 has been a whopping 20.77 percent. The unavoidable bottom line: U.S. competitiveness in this sector is faltering badly.

Even worse is the news about the “other private services” category, which includes high-paying info-tech and professional services work. This sector of the economy employs America’s best and brightest, and pays its highest wages. Yet this longstanding surplus has been eroding steadily as well – by 1.92 percent since 2002, to $47.99 billion.

Such a decline may seem modest and indeed hardly newsworthy at all. But in “other private services,” the United States and its providers should be wracking up large and rising surpluses. Otherwise, the numbers of Americans who can expect employment as software engineers, network administrators, financial analysts, lawyers, and doctors, may remain stuck at current levels. And if employment in these sectors rises, the reason is likely to be that American pay levels have sunk toward the much lower global norm.

Humongous U.S. trade deficits with China are no longer news, but the 2004 China figures give pause nonetheless. The China goods deficit rose from $124.1 billion to $162 billion, a $37.9 billion increase, or 30.53 percent This is a faster increase than that of the overall U.S. goods deficit. As a result, the China goods deficit currently makes up fully 28 percent of the total global U.S. goods deficit. (Country-by-country figures for 2004 services trade are not available yet.)

For some reason, globalization cheerleaders look at a Chinese economy growing at near-double digit rates and view its modest recent deficits and surpluses as a sign that China has become a major engine of growth for the rest of the world. What they conveniently forget is that an economy growing that fast should be in deep deficit with the rest of the world; it should be sucking in net imports like crazy. China’s more-or-less evenly balanced trade with the rest of the world is glaring evidence of its mercantilist trade practices, and of its role as a major drain on the world’s wealth-creating capabilities along the lines of Japan in recent decades.

Of course, America’s trade with China is anything but balanced. U.S. exports to the People’s Republic did rise in 2004 by $6.4 billion to $34.7 billion, an increase of 22.6 percent. But the much greater tide of U.S. imports from China rose $44.3 billion to $196.7 billion, a 29.07 percent jump.

Meanwhile, U.S.-European trade trends should be driving a stake through the heart of weak-dollar hopes. The Euro has been the currency against which the dollar has been weakest for two years. Yet the U.S. goods deficit with the Euro area (those European countries that have actually adopted the Euro) climbed $8.85 billion in 2004, a 11.95% increase. Exports rose $14 billion (a 12.4 percent increase), while imports rose $22.86 billion (a 12.2 percent increase).

Since new exchange rates almost never produce immediate or rapid changes in purchasing and importing patterns, some lag between the dollar’s weakening and a narrowing of the trade gap with strong-currency countries has to be expected. Indeed, if a weak-currency country has to import goods even though their prices rise (e.g., because these goods are no longer made domestically), the trade deficit may increase for a while. Economists call this delayed swing in the trade balance the “J-curve” effect.

At the same time, a weakening currency also may not affect trade balances much because the strong-currency country may have in place formidable trade barriers that restrict the weak-currency country’s exports. And the J-curve could take many years to play itself out. Americans have consistently experienced this problem with Japan. The Euro area might be an exception, but the jury is still out.

The possible limits of the weak-dollar policy become even clearer from examining America’s trade with Canada. Despite the Canadian dollar’s major appreciation against the greenback, the total U.S. goods deficit with Canada climbed $14.1 billion in 2004 to $65.77 billion. This 27.3 percent increase was nearly as fast a rise as that of the U.S. goods deficit with China – which brazenly manipulates its exchange rate. Exports rose $20.24 billion to $190.16 billion (an 11.91% increase), while imports rose $34.33 billion to $255.93 billion (a 15.5% increase).

The U.S. trade patterns revealed by the final 2004 trade figures are a national disgrace and a global danger. They remind us once more how perilously dependent the world has become on U.S. consumption, and yet how America’s ability to finance this consumption responsibly keeps eroding. Maybe the nation’s globalization cheer-leading political and economic establishments think that, like disaster movies, this story ultimately has a happy ending. When will they realize this isn’t Hollywood?

Alan Tonelson is a Research Fellow at the U.S. Business & Industry Educational Foundation and the author of The Race to the Bottom: Why a Worldwide Worker Surplus and Uncontrolled Free Trade are Sinking American Living Standards (Westview Press).

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