US Trade Deficit Keeps Growing

Reuters reports that the US trade deficit rose to $63.9 billion in March on the back of higher oil prices and massive imports. While higher oil prices were doubtless expected by anyone who has filled up their gas tank lately, the strong prices of imports were surprising.

The dollar is experiencing a period of extraordinary weakness, especially against the euro and the pound. Yet American consumers are not making the sorts of substitutions toward domestic goods that would be expected in these circumstances. The economic logic of buying less from expensive European manufacturers and more from domestic producers is apparently being overwhelmed by other considerations.

At the same time, the whole notion of the trade deficit is really just a statistical construction. What difference does it make if the US is purchasing goods from manufacturers in Arizona or China? Ultimately, the only aspect of the transaction that really matters is whether or not the consumer is happy with the deal. In an environment where China is purposefully depressing the value of its currency in order to encourage a shift in production towards its borders, it makes sense that Walmart is going to buy goods from China.

National borders are the great red herring of economic analysis. All wealth is ultimately held at the individual, not the national level. Now that everyone is off the gold standard, there is not even the visible transfer of gold around the world to reflect international trade flows. Goods and services are constantly moving across borders around the world, and given that there are typically much greater barriers to trade across borders than inside any given economy, the trade that overcomes these greater transaction costs is slightly more valuable than other trade. Yet international trade accounts for only about 20% of the US economy. Compared with many other smaller countries who routinely depend on the international marketplace for 70% of their production, the US is relatively unfazed by currency dips and booms.

Higher gas prices are bad for the consumers of energy and good for its producers. Sadly, most of those producers are countries with otherwise deplorable policies. But the ultimate shift away from fossil fuels is only likely to occur once the current energy infrastructure becomes too expensive. Rising energy costs are bad for consumption but fill a necessary role signaling the need for change. Once the US economy shifts away from its reliance on fossil fuels, historians will look back on this change as a net positive.