By Peter Coy
With the U.S. running record trade deficits -- nearly $52 billion in September alone -- the dollar's recent fall is just what the doctor ordered. On Nov. 17, the greenback hit an all-time low against the euro. It now costs over $1.30 to buy a single unit of the European currency. A lower dollar makes American goods more competitively priced on world markets. In the long run, that should help shrink the trade gap. But look out -- the textbook solution to a trade deficit is both painful and very slow-acting. Here's why a cheap greenback isn't a quick fix:
1. A huge imbalance
Imports are so much bigger than exports that it will take drastic changes to bring them into balance. This year through September, the U.S. imported $1.3 trillion worth of goods and services, while chalking up just $850 billion in exports. So if both keep growing equally fast, the trade gap will get bigger and bigger. Just to keep the shortfall from increasing, exports have to grow 50% faster than imports. Exporters like Boeing (BA ) will have to ramp up hard, while importers like Wal-Mart will need to cut back severely.
2. Gutted industries
The U.S. sector with the biggest trade deficit is consumer goods, ranging from clothing to toys. The shortfall in this area through the first 10 months of this year was nearly $200 billion. Trouble is, far too many American producers of consumer goods have gone out of business or moved offshore. So there's little hope of correcting the imbalance in this sector even if the dollar does fall.
3. Tenacious competition
Count on foreign competitors to do their best to hang onto their shares of the U.S. market despite the dollar's fall, even if it means sacrificing profitability. In the auto sector, for example, Toyota (TM ) has continued to increase its share of U.S. sales even though the yen's rise makes the carmaker's American revenue less valuable back home in Tokyo.
4. The infamous J Curve
When the dollar falls, the trade deficit usually gets bigger at first, not smaller. Here's why: Other countries charge higher dollar prices for goods they sell in the U.S. to compensate for the greenback's weakness. Americans continue to buy the same volume of goods from abroad, only now they pay more for each unit, so the total import bill rises.
Eventually, the high prices induce Americans to switch to locally made products, shrinking the import bill. But that can take many years -- especially in those gutted industries where made-in-America substitutes are hard to find.
5. Inadequate savings
Most economists view the trade deficit as a symptom of a deeper problem -- an imbalance in global savings rates. The Chinese, among others, save too much money instead of spending it on, say, beef from Nebraska or computers from Texas. Americans are the world's worst undersavers. The personal-savings rate has fallen from 10% or 12% in the 1970s and early '80s to just 0.2% in September. Compounding the problem, the federal government is dissaving -- that is, running a budget deficit.
The solution to the trade deficit is for other nations to loosen up and spend while Americans stop living beyond their means. But that goes beyond economics into the realm of national personality transplants.
6. A dose of inflation
If a cheap dollar puts American factory workers back to work, it's because U.S. consumers can no longer afford to buy as many imports. A lower dollar decreases the international buying power of Americans, making them, in a very real sense, poorer. The lower standard of living shows up in the form of import-price inflation.
In short, there's no free lunch. Closing the trade deficit will be agonizingly gradual. And it's going to hurt.
Coy is economics editor for BusinessWeek in New York
Edited by Beth Belton