The U.S. Trade Imbalance – It’s Now A Balancing Act

We’ve done a lot of thinking over the years, dangerous and severely out of style these days, about intended and unintended consequences. Some may be obvious: Offer the lowest price on gasoline of four stations at the same intersection and garner more business. Repave the subdivision road and gain better long-term maintenance costs. Others are less so.

For years, we’ve had what I call the “Wal-Mart debate.” Smaller communities everywhere note that when a Wal-Mart comes to town, shopping patterns in the neighborhood change. “Mom-and-pops” and other smaller stores often go out of business from the competition. We’ve certainly had relatives, friends, and neighbors counted on the list of these unfortunates. But, less obvious and harder to calculate is the potential benefit to the entire community, which receives lower prices and more choices. Local merchants start out by advertising the community connection only to succumb, in most cases, to their friends’ credit card choices.1

The recycling of export earnings by the emerging powers of Asia led to lower interest rates in the early 2000s. Some analysts at the time suggested that these investments may have dropped rates by as much as 1.5%. That meant lower mortgage rates and a warm, then hot, then bubbly housing market. There are many more elements to that issue, but loyal readers of the Daily Pfennig® newsletter get the point.

Importing products often receives the same half-cooked analysis. Some say buying things from overseas reduces American jobs, and so it does. But, like the Wal-Mart example above, delivering products to everyone in the country at a lower price benefits all. The math works.

Illustrating A Point
With this background, I was interested to read the following headline in The Wall Street Journal: “A lower peso means more American heroin addiction.”2 The article went on in brief that if economic activity falls in Mexico, more people could be forced into the drug business to make ends meet. And, if there continues to be a falling value for the peso, then dealers can try to provide this product to the U.S. at lower costs—increasing the demand and allowing cartels to expand their reach. I am not looking forward to that!

Rounding out, we have also noted in many conference talks over the years that many politicians and commentators call for a lower U.S. dollar to boost exports. Our newly elected President did so last weekend when he called the dollar “too strong.” It is absolutely true that a lower U.S. dollar will make products and services created here in the U.S. more competitive in the global marketplace, and I have no issues with that. But, people forget or fail to account for the fact that the U.S. balance of trade since the 1980s has been consistently negative, as shown in Figure 1. That means that we import more than we export. If the dollar weakens, imports become more expensive, which exacerbates an already difficult situation.

Fig. #1
Trade Balance In Goods & Services



Source: U.S. Census Bureau

(View a larger image here)

And, by the way, taking a look at the long-term trend of the balance of trade brings to mind a few interesting points:

1. As one would expect with a currency backed by gold up until the early 1970s when the U.S. departed from a gold standard, the U.S. balance of trade was essentially flat.
2. Starting in about 1980, as significant peacetime fiscal deficits began in earnest, the trade balance began to consistently deteriorate.
3. The decline in trade balance remained reasonably small in nominal terms until the early 2000s as the Asian exporters picked up real steam.
4. After a contraction during the Great Recession, the level has stabilized somewhat, as global economic activity has stagnated.

So, onward into the new administration and upward. Let’s see what new opportunities it will bring.

How do you think the latest interest rate hike will affect the U.S. economy? Let us know by visiting our blog and placing your vote in the “What’s Your Take?” section.

Until the next Daily Pfennig® edition…

Frank Trotter
EVP & Chairman
EverBank Global Markets Group