The November Trade Deficit Increases: Are There Options?

The old adage, ‘Some things must not change’, seems to be the story here. While the US’ trade deficit increased once again in November – this time to $47.8 billion – there is nothing new in that other than the amount. Total November exports were $177.8 billion compared to total imports of $225.6 billion (Department of Commerce figures released today) resulting in a deficit increase over October of $4.5 billion. Also, the amount of US exports decreased in November while the amount of imports increased. The consensus forecast for the November deficit had been for $45.0 billion, some $2.8 billion less than the realized figure.

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Compared to Nov 2010, exports are up 10% but imports are up 13%, which means that Americans are buying more, but from whom? Countries export products to sell them, if the gain is higher than can be expected from domestic sales. Conversely, they import products when the trading partners’ prices are lower than domestic prices, and/or it’s more practical to concentrate on the production of other products domestically. Not surprisingly US trade with China (NYSE:FXI) is once again the main deficit culprit: Chinese imports in November were $27 billion, some 56% of the deficit, down slightly from October. The reason that Chinese imports are the largest share is mainly the former above condition for importing: lower foreign prices, helped a lot by China’s undervalued currency, the yuan.

Efforts to get China to let the yuan float freely have been undergoing for many years, through more than one Presidential administration. Appreciation of the yuan against the dollar has been about 7% (in total) in recent years but that is apparently insufficient to stem the tide of imports into the US. In the most basic terms, if US importers of Chinese goods had to pay more to buy the yuan (which they must do, to purchase the goods) then US domestic goods would become relatively cheaper and thus more attractive domestically. But in the reciprocal nature of trading, this would have two down sides: US exports to China would fall as the dollar appreciates, and, Chinese goods would of course become more expensive here. Using a second old adage, ‘We can’t have our cake, and eat it, too’.

At one time, one way to estimate the wealth of a country was the number of goods it could import, implying that its residents could afford to buy imported goods that were more expensive, but were considered ‘luxuries’. That proposition is now turned on its head: Americans buy Chinese goods because they are cheaper, and they are often all that is available. But the more they buy, the fewer manufacturing jobs are available here, even though the sales of the goods help the sellers’ profits; it’s like economic Whack-A-Mole.

But what if ALL imports of Chinese goods were suddenly stopped? Shelves would quickly empty and prices of remaining products would soar. We would have perhaps a long inflationary spike, and US manufacturers would lose their exports to China, invoking the third old adage: ‘Be careful what you wish for’.

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To contact the reporter on this story: Mark Lawson at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com