February 13, 2004 (Trade Byte)
Year End Import Surge Caps Year of Record Trade Deficit
February 13, 2004
By Dean Baker
An unexpected jump in imports in December pushed the monthly trade deficit to the second highest on record and raised the year-round deficit to $489.4 billion, an increase of more than $80 billion from last year's record. This pushed the trade deficit to 4.5 percent of GDP, far above the 3.0 percent peak hit in the mid-eighties. With the U.S. now running a deficit in income flows, the current account deficit will be close to 5.5 percent for 2003.
The December jump in imports had not been expected. A fall in the size of the November deficit had fostered the belief that the decline in the dollar was leading the deficit to level off, if not actually decline. The December figures call this view into question. The turnaround on imports was broadly based, with almost all categories showing large increases. This jump in the trade deficit will have a large impact on the estimate of fourth quarter GDP. It will lead to a downward revision of approximately 1.0 percentage point, although upward revisions in inventory growth will be partially offsetting. Still, this means that economic growth and productivity growth going into 2004 are somewhat less robust than previously believed.
For the year as a whole, the nominal value of exports increased by just 4.6 percent. This follows two years of declining exports, but exports in 2003 were still more than $80 billion below their 2000 level. By comparison, imports were 8.3 percent above their 2002 level. They have increased by more than $40 billion since 2000.
The 2003 rise in imports occurred across categories. Imports of services rose by 7.7 percent. The category "other private services," which includes most forms of outsourcing, increased by 10.1 percent in 2003. However, the items in this category still only account for $76.4 billion of imports, just 5 percent of total imports and approximately 0.7 percent of GDP. Imports of industrial supplies rose by $38.8 billion, primarily due to higher oil prices, imports of consumer goods rose by $25.9 billion, and imports of capital good rose by $12.3 billion.
On the export side, the strongest growth was in exports of industrial supplies, which rose by $16.1 billion or 10.3 percent. Exports of capital goods rose by just $2.5 billion or 0.9 percent.
On a country basis, the rise in the deficit was also broadly based, with the U.S. deficit increasing with nearly all of its trading partners in 2003. The trade deficit with North America rose by $9.7 billion ($7.2 billion Canada, $3.5 billion Mexico) to $95 billion ($54.4 billion Canada, $40.6 billion Mexico). The deficit with the European Union rose by $12.2 billion, to 94.3 billion. The trade deficit with China rose by $23.9 billion to $124.0 billion. The deficit with Japan fell by $4.0 billion to $66.0 billion.
Going forward, there seems little hope for substantial improvement in the trade deficit until the dollar declines further. The dollars' decline to date against the euro and the yen may have slowed the rate of increase in the deficit with the euro zone nations and led to some decline in the deficit with Japan, but bringing the trade deficit down to a sustainable level will require a much more broadly based decline in the value of the dollar. The markets seem to anticipate that such a decline is nearing, as the Japanese central bank has been fully supporting the U.S. current account deficit in recent months with its purchases of dollars. Presumably it will not do so indefinitely.
When it does occur, the decline in the dollar will have a mixed effect on the U.S. economy. On the one hand, it will provide a powerful boost to the export sector. At the same time, a large increase in import prices will be inflationary and will surely lead to some upward pressure on interest rates. If the U.S. housing market has not already collapsed at the point when the dollar corrects, the declining dollar is likely to be the factor that finally pricks the bubble.