Smith Faculty Opinion Article	May 8, 2008
By Dr. Peter Morici, Professor of International Business                                                                       E-MAIL       WEB SITE

Commerce Department to Release February Trade Deficit Data on Friday

Friday, the Commerce Department will report the March trade deficit.

Last month, the Commerce Department reported the February deficit on goods and services was $62.3 billion. For March, my published forecast is $64.9 billion and the consensus forecast is $61.3 billion.

The February deficit on trade in goods was $72.9 billion and was partially offset by a $10.6 billion surplus on services.

The key data to watch Friday will be the deficits on petroleum and motor vehicles, the deficit with China, and the progress of U.S. exports.

Together, the deficits on petroleum, on motor vehicles and with China totaled $62.3 billion in February, or equal to the entire trade deficit on goods and services.

The deficit on petroleum products is expected to rise in March from $32.5 billion in February, because oil import prices rose 9.1 percent, according to the most recent Labor Department report on import and export prices. Commerce and Labor Department pricing data do not always coincide, because the Labor Department reports import prices earlier and its data are more preliminary. Energy Department data indicate the volume of oil imports eased a bit in March but not enough to offset the effects of a 9.1 percent price increase; the same caveats regarding Labor Department pricing data apply to Energy Department import volume data.

The trade deficit on motor vehicles was $11.4 billion in February, up from $10.4 billion in March. On the one hand, sluggish new car sales in the U.S. should drag down this deficit a bit; on the other hand, the shift from truck-based vehicles to small cars is boosting the prices and volumes of imports.

In addition to high oil prices and the shift to smaller motor vehicles, overvaluation of the dollar against the Chinese yuan continues to push up the trade deficit. China has permitted the yuan to rise 16 percent since July 2005, or less than 6 percent a year. However, thanks to rising productivity, the underlying value of the yuan rises much more than 6 percent a year. This is evidenced by the fact that China has been forced to increase its currency market intervention to sustain its controlled exchange rate for the yuan. In 2007, it purchased $462 billion in dollars and other foreign currencies, as compared to $247 billion in 2006.

The Chinese yuan is at least 40 percent undervalued against the dollar. In 2007, the U.S. deficit with China hit a new record and was $18.4 billion in February. New Year’s celebrations usually depress Chinese exports in February; normally, the bilateral deficit would surge in March but flagging U.S. retail sales may provide some moderation.

Over the last two year, monthly exports have risen $26.8 billion to $151.4 billion, thanks to a weaker dollar against the euro, pound and other market determined currencies. This has moderated the deficit on trade in non-petroleum products and the overall trade deficit. U.S. exports compete with EU exports in nearly every category, and a weaker dollar against the euro helps boost U.S. sales in Europe and elsewhere around the world. However, oil is priced in dollars and a weaker dollar has pushed up, somewhat, the price of oil and the U.S. petroleum trade deficit. Further, many other Asian governments follow China’s lead by intervening in foreign currency markets and maintaining undervalued currencies, and this limits U.S. export gains in Asia.

Whatever the final trade deficit figure, it will be close to 5 percent of GDP, which is too large to be sustainable.

The foreign borrowing to finance the deficit is about $50 billion a month, as only about 11 percent of the deficit is financed by new direct investment in productive assets. Debt to foreigners now exceeds $6.5 trillion, and this flood of greenbacks abroad is driving down the dollar, heightening concerns about the solvency of U.S. financial institutions, pushing up the price of gold, and exacerbating the recession.

The stubbornly large trade deficit heightens the risk of recession. The deficit subtracts about $250 billion from GDP, and that amount could double if the economy slips into a prolonged recession. 

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.                                                          ►More Faculty Opinion Articles