Friday, September 10, 2004

News on the US trade deficit only needs a broken record run once a month to be accurate, but the incredible ballooning US current account deficit together with the incredible levitating dollar which is its surprising fellow traveller both still bear reporting.
The U.S. trade deficit narrowed more than expected in July, but still was the second highest on record at $50.1 billion even though imports dropped for the first time in 10 months and exports leapt higher, the U.S. government said on Friday.

The trade gap declined nearly 9 percent from a revised estimate of $55.0 billion in June for the biggest monthly decline since December 2001, the Commerce Department said. Analysts surveyed before the report had pegged the July trade deficit at $51.75 billion.

The near record deficit could renew pressure on the dollar, which has traded in broad range between about $1.1750 and $1.2450 against the euro the past six months.

On Thursday, San Francisco Federal Reserve Bank President Janet Yellen said any turnaround in the U.S. trade deficit must involve the dollar.
I love the way the media tries to spin the second largest trade deficit ever as good news.

As it stands, the eight largest trade deficits in US history have occurred during the last eight months. Before the balloon really started swelling in December 2003, the largest trade deficit had been $43.7bn; now we're supposed to breathe easy because we're down to $50.1bn. On the year, the trade deficit is $339.0bn, over 17% larger than last year's record breaker and 47% larger than the deficit in 2002.

One would think, of course, that a current account deficit well over 5% of GDP would be putting serious pressure on the US dollar, but that couldn't be less true. Since the the most fevered phase of the swelling deficits began in December, the dollar has actually gone up not down, and been quite stable all summer long. Nothing seems to be able to dissuade the Japanese and Chinese central banks.
Meanwhile, the politically sensitive U.S. trade deficit with China set another monthly record at $14.9 billion as imports increased 3.7 percent from June and exports fell 2.6 percent, the government said.

U.S. manufacturers estimate the 2004 trade gap with China will surpass $150 billion, easily topping the record of $125 billion set last year. They blame China's policy of pegging its currency against the dollar for the soaring bilateral deficit. Economists estimate the yuan is undervalued by 15 to 40 percent because of the peg.

On Thursday, the U.S. Trade Representative's office rejected a petition from labor, textile and steel groups seeking a challenge of China's currency policies at the World Trade Organization. The Bush administration said it is making progress on the diplomatic front persuading China to move to a floating exchange rate.
It's truly amazing to compare the politics of US trade deficits in the mid-1980s to today. While the deficit with China today may be "politically sensitive," those being throttled by Chinese imports have absolutely no political power. In the 1980s US manufacturers could pressure the Reagan administration to threaten the Japanese with Super 301, push "voluntary" export restraints on them and even force Honda, Toyota and the rest to built plants in the US. And today? US manufacturers have gone global and so don't give a damn about the US manufacturing economy. Those few who do lie prostrate on the ground.

And Bush is "making progress"? Yah, right. You'll be seeing a floating yuan just about the time you see North Korea hand its nuclear weapons over to the United Nations and beg forgiveness.

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