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U.S. Difficult To Permanently Improve Trade Balance: April 17, 2012

ByThe National Bank of Canada
Published 04/17/2012, 03:47 AM
Updated 05/14/2017, 06:45 AM

February’s US trade report showed the lowest deficit in four months, helped by a sharp drop in oil imports and a smaller trade deficit with China. While that’s a move in the right direction in terms of reducing global trade imbalances, we doubt that this improvement has legs.

True, US oil imports have been on a declining trend since 2005 thanks to improved production at home and better fuel efficiency that has capped demand. But lower volumes haven’t spared America from a higher oil import bill given the soaring prices. Barring a global recession, emerging market demand is likely to keep oil prices elevated. So expect the US to keep running large trade deficits with OPEC nations. The fact that the latter’s currencies are pegged to the greenback makes it even harder to reduce the trade imbalance.

Inflexible exchange rates are also preventing an arguably more important adjustment from taking place, namely a reduction of the US goods trade deficit with China. The reported deficit (which is not seasonally adjusted) narrowed to an 11-month low in February, reflecting interruptions related to the Chinese new year celebrations. But on a 12-month cumulative basis, the goods trade deficit with China reached a new record high.
U.S. Difficult To Permanently Improve Trade Balance

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