February 20, 2003 (Trade Byte)
Falling Exports Lead to Record Deficits for Month and Year
February 20, 2003
By Dean Baker
A decline in exports of $2.1 billion in December, coupled with a $2.1 billion increase in exports, raised the trade deficit for the month to a record $44.2 billion. For the year exports fell by $15 billion, while imports rose by $51.9 billion, pushing the deficit for the year to $435.2 billion, or 4.2 percent of GDP-also a new record.
The decline in exports in 2002 was the second consecutive annual decline. This is only the second time in the last half century that exports have fallen for two straight years. While exports to all regions declined in 2002, the sharpest drops were a $17.6 billion (10.1 percent) drop in exports to Europe and a $6.5 billion (11.3 percent) drop in exports to South America. The fall in exports to Europe is striking given that the dollar has lost more than 20 percent of its value against the euro in the last two years. Declining exports to South America are a result of the economic crises in much of the region.
The biggest rises in imports were a $17.6 billion (4.7 percent) increase from Pacific Rim countries and a $6.9 billion (2.9 percent) increase from Europe. The increase in imports from the Pacific Rim was attributable to a $23.1 billion (22.4 percent) increase in imports from China.
Almost half of the overall trade deficit is with the Pacific Rim countries. The deficit with China was $103.1 billion and the deficit with Japan was $70.1 billion. The deficit with Europe was $89.2 billion in 2002.
By product category, the largest increases in imports were a $14.2 billion (7.4 percent) rise in automobile imports, a $23.3 billion rise (8.2 percent) in imported consumer goods, and a $30.9 billion (14.7 percent) rise in imported services. The largest decline in exports was a fall of $31.1 billion (9.7 percent) in exports of capital goods. The fall in capital goods exports is undoubtedly tied to a falloff in U.S. investment abroad, since capital goods exports are often associated with the movement of manufacturing capacity overseas.
The large jump in the trade deficit in December will lead to a downward revision in reported GDP growth for the 4th quarter, since the deficit is considerably larger than the Commerce Department had assumed in its advance GDP report. The larger deficit would subtract approximately 0.6 percentage points from GDP growth for the quarter, although a higher than expected figure on December inventories will offset most of this decline.
Imports of petroleum actually fell very slightly in 2002, although the oil imports in the 4th quarter were running far higher than their average for the year. With oil prices continuing to rise, it is virtually certain that oil imports will rise from their 2002 level in the current year.
The path of trade in 2002 should raise serious concerns about the long-term health of the U.S. economy. As a result of past interest and dividend payments on prior borrowing, as well as other non-trade payments, the current account deficit is now considerably larger than the trade deficit, with the U.S. borrowing in excess of $500 billion (more than 5.0 percent of GDP) a year. This pattern cannot be sustained for long, just as a $500 billion budget deficit could not be sustained indefinitely. If borrowing at this level continues, the United States will have a negative net asset position of more than $10 trillion in 10 years.
At present, foreign investors and central banks have been willing to buy large amounts of U.S. financial assets, which has pushed up the dollar and created the trade deficit. In the last two years they have taken large losses on these holdings as the U.S. stock bubble has collapsed, the dollar has fallen by 20 percent against the euro, and U.S. debt now pays a lower interest rate than euro denominated debt. It is not clear how much longer foreign investors will sacrifice returns to hold dollars.