Why U.S. Exports Will Fall Sharply
Brad Setser thinks that the U.S. trade deficit will start falling sharply. I too think it will fall during the coming months, though probably not in any dramatic way. And after that it will probably not fall any more.
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.
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.
posted by stefankarlsson at 10:36 PM
4 Comments:
The dollar's rise will have an impact with a lag -- but otherwise I agree that there is reason to think that the pace of US export growth will slow significantly/ could turn negative. There tho is also reason to think that the pace of US non-oil import growth could slow dramatically tho, as the US consumer stops shopping/ stops borrowing. Given that imports are a bigger share of US GDP than exports, a say 5% fall in both non-oil import sand non-oil exports would produce a modest improvement in the non-oil trade balance. All in all tho that is a bleak forecast, with the deficit falling more on the back of US weakness and a fall in US consumption than on the back of strong export growth. the main source of adjustment then is just the fall in oil prices -- which will have a significant impact on the US.
I simply wanted to show what would happen if oil falls and the gap between us nominal imports and nominal exports stays constant -- i didn't necessarily want to imply that this is the only plausible scenario. A world where the improvement in the oil balance is offset by less rapid improvement in the non-oil balance is quite plausible.
bsetser
Brad, you're right that the dollar's rise work with a lag. Oil prices work with a lag too, but a shorter one than the dollar. That's why I wrote that I too expect the overall trade deficit to fall during the coming months. But starting sometime during early 2009, I think the non-oil deficit will rise again (unless the dollar rally quickly reverses).
The reason is the quite dramatic increase in the value of the dollar. It is at an all-time high against the Mexican peso (up 20% in just a month) and at the highest since 2005 against the Canadian dollar and the overall dollar index is at its strongest since early 2007. This will minimize the effect of the U.S. slump on imports, while greatly aggravating the effect of the downturn in most other economies on exports.
You have a valid point about the fact that imports are larger than exports to begin with, but it's not really that much bigger if you exclude oil. And so, while the effect on the non-oil deficit of weaker foreign economies will be mostly or even completely cancelled out by the deepening U.S. slump, the rapid appreciation of the dollar makes it likely that the decline in exports will be larger than the decline in imports.
I would guess that all the liquidity that is being directly or indirectly pumped into the U.S. financial system will prevent imports from a dramatic decrease.
The strong dollar will make U.S. exports much harder and imports easier. U.S. producers may start to collapse and the consumers will have to replace them by the cheaper imported competition.
We may see which of these effects is the fastest one but I expect the U.S. dollar strength to be manifest in the export numbers within 3 months, i.e. around the end of the year. At that time, bankruptcies may begin selectively in the U.S., starting with GM, Ford, and Chrysler, opening importers much wider a space.
What I want to say is that in these potential cycles of depression, a normal instinct of a threatened country should be to try to devalue its currency. I believe that this is what various countries were doing e.g. in the 1930s and their egotist reasons to do that were rational.
LM
if capital account more or less stabilizes but the budget deficit grows significantly due to the fiscal stimulus program, what are the implications for the dollar (absent high interest rates, which are not likely in a current deflationary environment)?
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