Dismal Trade Report for April

The June 4 trade report was dismal in every way.  U.S. exports fell, imports rose, and net exports (exports minus imports) reached their lowest level in two years, down from a negative $44.2 billion in March to a negative $47.2 billion in April.

Worsening net exports are a huge drag on the U.S. economy. During the first quarter (January through March 2014), they contributed a negative 0.9% to real GDP, accounting for almost the entire 1.0% fall in real GDP. The April trade statistics are even worse. Apparently, the drag of worsening trade deficits upon U.S. economic growth is continuing. 

There are at least four trends contributing to falling U.S. net exports:

1. Slowing world economic growth. Falling U.S. exports usually indicate slowing world economic growth. On November 29, we predicted just such a slowdown. The robust world economic growth predicted by others for 2014 has yet to materialize.

2. Quantitative Easing. The Federal Reserve's strategy of buying long-term U.S. bonds sent private savings abroad which temporarily drove the U.S. dollar down and some other countries' currencies up. Now, that Quantitative Easing is ending, U.S. net exports with these countries are falling. For example, U.S. net merchandise exports to India resumed falling in July as shown in the graph below: 

3. Chinese Mercantilism. After letting the Chinese yuan strengthen in 2013, the Chinese government drove down the yuan-dollar exchange rate in 2014 from 16.37 cents at the beginning of January to 16.19 cents at the beginning of June. Doing so made Chinese products less expensive and American products more expensive. U.S. net exports in goods with China were about $3 billion worse in both March and April than they had been one year earlier.

4. Vietnamese Mercantilism. The Vietnamese government has been following the Chinese strategy of maximizing exports while keeping out imports in order to obtain foreign industries. The decline in U.S. net exports to Vietnam has been accelerating as shown in the graph below of U.S. net merchandise exports to Vietnam:

The Obama administration and the U.S. Chamber of Commerce will likely continue their efforts to pass the Trans Pacific Partnership, which would probably worsen U.S. net exports with Vietnam and the other included countries. Earlier trade agreements similarly enabled Mexican, Chinese and South Korean mercantilism, because they permitted currency manipulation and did not require balanced trade.

The United States could pass a tariff, scaled to our trade deficit with each trade surplus country. Such a tariff would balance trade and accelerate U.S. economic growth. Unfortunately, given the current establishments in both parties, it is much more likely that Washington will pass agreements that enable mercantilism.

For a few years, Quantitative Easing kept the U.S. trade deficits from worsening. Now that Quantitative Easing is ending, it is likely that growing trade deficits will further drag down U.S. growth, just as they did during the first quarter.

Howard Richman with his father and son co-authored the 2014 book Balanced Trade, published by Lexington Books.