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Increase in U.S. Trade Deficit Signals Thaw in World Economic Deep Freeze

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The world price of oil has started to move higher again. One should be careful not to read too much into this. Still, it is an interesting and mildly encouraging turn of events. And it is having some impact on foreign trade figures. For example, the U.S. trade deficit in goods and services did nothing but decline significantly from October of last year through February. In the latest results, for March, it reverted more to form. Also noteworthy are the trade positions of some chief trading partners of the U.S.

The world price of oil has started to move higher again. One should be careful not to read too much into this. Still, it is an interesting and mildly encouraging turn of events. There are three factors at work: (1) increasing oil imports by China; (2) production restraint by OPEC; and (3) speculation that the U.S. economy is on the verge of better news.

Improvement in U.S. Trade Picture at an End? 

Oil/'s price has moved up from $34 USD per barrel at its low point in February to around $60 today. This is having some impact on foreign trade figures. For example, the U.S. trade deficit in goods and services did nothing but decline significantly from October of last year through February. In the latest results, for March, it reverted more to form.

The U.S. annualized trade deficit figure of between $700 billion and $800 billion eased to only $300 billion in the second month of this year. In March, it expanded again, if only to a small degree. The several-months improvement in the trade picture, brought on by the recession, falling import demand and rock-bottom commodity prices, might be at an end.

China/'s Thaw

There are the first faint stirrings of warmer economic breezes, after the harshness of a protracted winter freeze. Chinese industrial production is on the upswing again. China is one of only a handful of countries in the world that can make that claim. Egypt and South Africa are two others, although the latter has an unemployment rate of nearly 25%.

China/'s thaw is helping to raise the all-items commodity price index for the first time in many months. Nearly half of the U.S. goods and services trade deficit is with China. This is up from about one-third as a result of the recession. U.S. energy imports have fallen, but the need for cheap consumer goods in essential product areas has remained intact.

The proportion of the U.S. trade deficit accounted for by OPEC has dropped significantly, from 24% a year ago to 7% now. The shares held by Canada and Japan have also slipped substantially. In Canada/'s case, it/'s a story of weak auto exports and lower returns in the oil patch. In Japan/'s case, it/'s auto trade and a high-valued yen. 

Trade Positions of Chief Trading Partners

Also noteworthy are the trade positions of some chief trading partners of the U.S. Japan/'s trade surplus in goods (i.e., the merchandise trade balance) has nearly disappeared, but when returns from foreign investments are included (i.e., the current account balance), a significant surplus is restored. Japan/'s large investments elsewhere and consequent income returns were the reasons the yen held up even as the U.S. dollar surged last fall.

China continues to have the largest current account surplus in the world. Germany/'s surplus is about half of China/'s, but that still leaves it ahead of Japan/'s. The other nation with a current account surplus in excess of $100 billion USD is Saudi Arabia, thanks to its oil wealth and despite the fall-back in world demand brought on by the recession. Russia has a large merchandise trade surplus (due to natural gas exports), but its current account surplus gives about half of that figure back again.

United States/' Foreign Trade: Goods and Services Balance


U.S.

Based on seasonally adjusted monthly figures, projected at an annual rate.
Analysis of U.S. foreign trade usually focuses on goods and services exports minus goods and services imports.

Data source: U.S. Bureau of the Census/Chart: Reed Construction Data - CanaData.

U.S. Goods Trade Deficit with Major Countries and Areas – March 2009


Alex Carrick
   
Annualized
Percent of Total
   
Figure
U.S. Goods
   
(U.S. $ billions)
Trade Deficit
       
Canada
1 Year Ago
-77.0 11.0%
3 Months Ago
-33.4 5.8%
Latest Month
-10.0 2.5%

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