The Great Trade Debate

The record trade deficit for the U.S. last year has sparked a growing debate. But the latest numbers show some little-noticed good news

Yup, the $763 billion U.S. trade deficit racked up last year is a record breaker. The bill for oil imports set a new high, as did America's deficit with China, according to the Commerce Dept. report on Feb. 13. The growing deficit has sparked a debate between those who think the U.S. should take action to bring it down (see, 2/14/07, "A Radical Plan to Manage Globalization") and those who oppose government intervention (see, 2/14/07, "Trade Truths for Turbulent Times").

Still, behind the headline numbers was some little-noticed good news. The U.S. actually posted smaller deficits than in 2005 with most of its biggest trading partners, including Canada, Britain, Europe, South and Central America, South Korea, and Hong Kong. American exports of corn, copper, aircraft, and jewelry, among other things, increased. So did royalties and licensing fees for movies and other intellectual properties. "It's stealth improvement," says Michael Englund, chief economist of Action Economics, a consulting firm in Boulder, Colo.

According to BusinessWeek's calculations, this nonoil, non-China deficit has fallen sharply since it peaked back in the first quarter of 2005, at 2.6% of gross domestic product. In the last three months of 2006, it was just 1.6% of GDP.

Times Have Changed

What's behind the improvement? A slight decline in the dollar's value from its 2002 high has helped a bit. Helping more: unusually strong worldwide growth, which increases the demand for U.S. goods—everything from Boeing (BA) jets to Paramount Pictures (VIA). Action Economics' Englund estimates that world GDP growth was a robust 5.3% in 2006. And he expects another strong year in 2007, with global growth of about 4.9%. Such strong growth used to trigger runaway inflation, which in turn led to recessions. But developed and developing countries alike have gotten better at controlling inflation. So growth cycles aren't cut short.

To be sure, the overall U.S. trade deficit is still a whopper. And while oil's contribution to that imbalance will shrink if prices stay at or below $60 a barrel this year, the gap with China is almost certain to keep growing as production continues to shift to China from the U.S. and other countries (see, 1/25/07, "China Growth Blows Past Forecasts").

Revaluation of the Chinese yuan alone won't resolve the problem, says Oded Shenkar, an economist at Ohio State University. China's competitiveness is improving, he says. He points out, too, that the country continues to underpay for U.S. intellectual property by copying it illegally. The China deficit is "the big boy," says Shenkar. The good news? For the U.S., the China deficit is now the exception, not the rule.

    Before it's here, it's on the Bloomberg Terminal.