Why U.S. Exports Will Fall Sharply
Setser points to how earlier this year, exports have increased a lot faster than non-oil imports and argues that now that the price of oil has fallen dramatically, the oil import bill will fall and so lower the overall trade deficit.
But what Setser completely overlooks (he doesn't even mention it) is the fact that the conditions that created the decline in the non-oil deficit have been swept away. Since these conditions were also responsible for the high oil price, one would have thought that he would have noticed them, but apparently not. First of all, economic growth in the rest of the world has deteriorated dramatically and secondly, the dollar's exchange rate has strengthened dramatically. These two facts will likely not only end the decline in the non-oil deficit but cause it to start rising again.
On the other hand, the U.S. slump is of course also worsening, thereby limiting the increase in the non-oil deficit. What seems certain though is that exports will start falling significantly in the coming year because of the weaker foreign economies and the overvalued dollar. Also, the decline in the price of food commodities will lower the value of U.S. agriculural exports. The domestic slump in the U.S. will by contrast limit the import boosting effect of the overvalued dollar. That will likely still cause the non-oil deficit to rise, while the lower oil price causes the oil deficit to fall. All of this probably means that although the U.S. trade deficit will probably fall in the coming reports, it will stabilize during 2009 at a level not much lower than today. Indeed, if (with emphasis on if) OPEC manages to stabilize the oil price through output cuts, the deficit will in fact start rising again in 2009 as a significant drop in exports cause the non-oil trade deficit to rise.