Trade Deficit Hits Lowest Level in 6 Months

[HenryTo]

Watch out, dollar bears: http://www.marketthoughts.com/z20050501.html

Quote from that commentary: "This recent trend of declining foreign dollar reserves held at the Federal Reserve Banks is also reaffirming my view that the growth in world trade is now slowing down – thanks to the recent renewed backlash against Chinese imports and outsourcing/offshoring. In the short-term, the outsourcing and offshoring trend has probably been overdone, but in the long-run, I remain bullish on both outsourcing and offshoring. I have not shown this here but when world trade slows, commodity prices as measured by the CRB Index usually goes down – including oil prices. For readers who have always wanted a direct view from us on the markets – well, our message for this week is: Buy the U.S. dollar and sell all commodities and commodity stocks, including oil stocks. I believe they have now topped out in the intermediate term (for the next couple of years)."

And it is also interesting to note that whenever the current account deficit has shrunk considerably (we are still very far away from that) it is usually followed by a collapse of some marginal emerging market. Could that market be China? Stay tuned.
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Trade Deficit Hits Lowest Level in 6 Months
Wednesday May 11, 8:44 am ET
By Martin Crutsinger, AP Economics Writer
U.S. Trade Deficit Drops Sharply in March to Lowest Level in Six Months; Exports at All-Time High


WASHINGTON (AP) -- The U.S. trade deficit fell sharply in March to the lowest level in six months as U.S. exports climbed to an all-time high and the surge of textile shipments from China slowed.

The Commerce Department reported Wednesday that the gap between what the United States imports and what it sells to foreign countries narrowed by 9.2 percent in March to $54.99 billion, down from the record monthly deficit of $60.57 billion set in February.

Even with the big improvement in March, the deficit through the first three months of this year is still running at an annual rate of $696 billion, 12.8 percent higher than the $617.08 billion record set for all of 2004. Critics say the widening trade gap demonstrates the failure of the Bush administration's free trade policies.

The March improvement reflected a 1.5 percent increase in exports of U.S. goods and services, which rose to an all-time high of $102.2 billion, the fourth straight monthly record. The March improvement reflected gains in a wide range of products from commercial aircraft and telecommunications equipment to farm products and art work.

Imports, which had hit a record high in February, fell by 2.5 percent to $157.19 billion, reflecting a big drop in imports of foreign cars and in textile and clothing imports from China. This helped to offset a 4.1 percent increase in America's foreign oil bill, which rose 4.1 percent to $18.9 billion, the second highest level on record.

The deficit with China, which has become a growing target of attack in Congress because of its position as the country with the largest trade gap with the United States, declined by 7 percent to $7.83 billion in March. The narrowing trade gap reflected in part a 21.2 percent drop in imports of clothing and textiles in March.

However, Chinese imports of these products are still running 54 percent higher in the first three months of this year when compared with the same period a year ago. This reflects the surge that has occurred after global import quotas were lifted on Jan. 1.

The U.S. textile industry is pushing the administration to re-impose quotas, saying that without the protection the U.S. industry will suffer thousands of job losses.

While the deficit with China was lower last month, the deficit with Japan shot up by 14.1 percent to $7.83 billion. The deficit with Canada declined by 12.5 percent to $5.05 billion but the deficit with Mexico, the other partner in the North American Free Trade Agreement, surged by 16.1 percent to $4.26 billion. The deficit with the 25-nation European Union was up 9.9 percent to $9.31 billion.

The administration argues that the trade deficit primarily reflects the fact that the United States has been growing at a faster rate than much of the world, boosting our demand for imports while the demand for U.S. products has lagged.

Administration officials contend that the way to compete in a global economy is to push to eliminate barriers to sales of American manufactured goods, farm products and services such as banking around the world.

But critics charge that these free trade deals primarily benefit U.S. corporations who are able to shut their U.S. manufacturing plants and move production to low wage countries with free trade deals and then shipment the finished goods back to the United States duty free.

This argument is expected to intensify in coming weeks as the administration tries to round up enough votes to pass the Central American Free Trade Agreement covering six Latin American countries. The leaders of those nations, in an unprecedented move, were on Capitol Hill on Wednesday to lobby as a group for votes to pass the measure.

[nodoodahs]

Correction: I had said "A devalued currency is a tax on foreign assets" and that is incorrect.

I should have said "The devaluation of currency is a tax on holders of that currency."

See new post on this idea.

[nodoodahs]

The dollar will continue to fall long-term. A devalued currency is a tax on foreign assets and a way to recapture the value of currency transferred away through the continued, amazingly high current account deficit. Yes, the reports are smaller than expected, but it's still HUGE.

The dollar will fall, long-term, as a direct intentional result of US foreign policy. That's not to say that shorter-term rallies and sideways movements aren't likely.

See 2005 paper by Pierre-Olivier Gourinchas of Berkeley. A quote:

Almost all of US foreign liabilities are in dollars and approximately 70% of US foreign assets are in foreign currencies. A back of the envelope calculation indicates that a 10% depreciation of the dollar represents, ceteris paribus, a transfer of 5% of US GDP from the rest of the world to the US. For comparison, the US trade deÞcit on goods and services was only 4.4% of GDP in 2003. With large gross asset and liability positions, a change in the dollar exchange rate can transfer large amounts of wealth across countries.

[nodoodahs]

Watch carefully the strength of the US$ relative to the Euro. When the daily exchange moves 4% or more above the 90 day moving average, the Euro rebounds.

This has occurred on 156 of 1429 trade days observed. If you had placed money in Euro denominated 3-month CD's on each of those days, your average return on the currency (not the interest on the CD) would have been 2.7% and the dollar fell on 71.8% of those 3-month periods.

Almost the exact reverse applies when the US$ strength falls 5.6% below its 90 DMA (2.2% return on the dollar and dollar gains 74%, on 150 out of 1429 observations).

Since this is speculation and not investing, I have not been able to convince my wife to let me do this.