The Inscrutable Meaning of the Shrinking Trade Deficit

Buried on page 2 of today’s Wall Street Journal is a single-columned story headlined “Slow Spending Helps Narrow Trade Deficit.” After decades of a stagnating exports and steadily rising exports, the United States trade gap narrowed 6.9 percent in December to $58.8 billion. Despite higher oil prices, the trade gap for the full year narrowed 6.2 percent — the biggest decline in percentage terms in 16 years. At last, the positive impact of a weaker dollar is kicking in.

Why does the shrinking trade gap matter to a blog that focuses exclusively on Virginia? Because Virginia’s economy is inextricably tied to global trading patterns. Not only that, but lawmakers are being urged to make massive infrastructure investments based on those global trading patterns.

Hampton Roads is undergoing a massive expansion of port capacity predicated on the view that the volume of imported containers, mostly from China, will continue basically forever. Anticipating a surge in the volume of cargo shipments, port and maritime interests are urging lawmakers to spend billions of dollars to build a Third Crossing and upgrade U.S. 460 in order to accommodate those trucks. To pay for those multi-billion investments, Hampton Roads politicians have yoked the citizens and businesses of the region with significant transportation taxes.

But no trend continues in a straight line forever. Even the world’s largest economy cannot sustain balance-of-payment deficits approaching $1 trillion — that’s trillion with a “tr” — a year forever. Inevitably, the value of the dollar has plummeted, and there is little prospect, given the easy-money regime of the Federal Reserve Board, that it will get stronger any time soon. Americans have seen the downside of the weak dollar in the form of higher prices for oil and other imported goods. Now we’re finally seeing the upside. Exports rose to a record $144.3 billion in December. More to the point of this blog post, as the WSJ reports:

Exports rose while imports fell. That underscores a shift in the economy as domestic consumer spending slows and foreign demand for U.S. goods remains strong. … The drop in nonpetroleum imports — a major gauge of consumer demand — was widespread. … “Disturbingly, the drop in imports was led by autos and consumer goods,” wrote Lehman Brothers economist Drew Matus.”

As far as the Ports of Virginia are concerned, it shouldn’t much matter whether exports and imports are rising and falling as long as the same volume of goods gets funneled through the ports. But the ratio of imports to exports very much matters to transportation planners. Right now, thousands of trucks pick up containers in Norfolk, haul them to inland destinations, and then dead-head back to the port to pick up more containers. Rising imports implies the need for more trucks — and highway capacity. But a leveling off of imports suggests that the anticipated surge in truck traffic may not materialize. The surge in exports poses no comparable problem because rising volumes can be accommodated by filling up trucks now driving back empty to the ports.

What worries me is that the business-political establishment of Hampton Roads will plunge ahead blindly with its monumental road improvement projects, saddling the region with a massive extra tax burden in order to handle an increase in imports that never materializes. Hold gun firmly in hand. Cock trigger. Point gun to head. Pull trigger.

Declining imports and rising exports have other implications that Bacon’s Rebellion shall explore as occasion permits. One trend worth watching: A surge in exports could underpin the U.S. economy, strengthening the manufacturing sector to offset weakness in the homebuilding and financial sectors. The economic downturn may not be as severe as anticipated. That may be good news for lawmakers in Richmond fashioning the next two-year budget.

A second trend worth watching: A newly competitive U.S. manufacturing sector is very, very good news for Virginia’s mill towns, which have seen their manufacturing-based economies hollowed out for some three decades now. With U.S.-based manufacturing suddenly looking more competitive, Virginia should consider investing more heavily in the Virginia Economic Development Partnership, the organization that promotes both Virginia exports and inbound manufacturing investment. We could well see a pick-up in the number of announcements like the one made yesterday in which Com.40 Ltd, a Polish manufacturer of mattresses and upholstered furniture, will invest $36.3 million and create 813 jobs in the City of Danville.

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  1. Larry Gross Avatar
    Larry Gross

    My first thought.. which probably demonstrates my abject ignorance is.. what is it in Danville that makes it a more advantageous place to manufacture mattresses when employee costs are 3, 4, 5 times higher than those costs in Mexico or China, et al?

    hmmm.. looks like Kaine helped Danville beat out North Carolina competitors.

    No one can claim that Kaine has been asleep at the switch on economic development issues especially for RoVa.

    but then this:

    “Smith said that the weak dollar may have played a factor in Com.40’s decision, in that it allows Com.40 to buy raw materials in dollars rather than in euros.

    “It is hard to tell what the future brings for bringing jobs back to the United States,” Smith said. “In certain niches, it makes sense. Things are also changing rapidly in China, as well as other countries, making certain products more competitive here.”

    no doubt, RH will demand a full study to figure out how much we owe the losers for stealing their manufacturing jobs…


  2. Anonymous Avatar

    “…no doubt, RH will demand a full study to figure out how much we owe the losers for stealing their manufacturing jobs…”

    You really should stop misrepresenting my position. Competition is one thing. Subsidies are something else. Incentives are different still.
    Investments are yet another animal.
    As I see it an incentive is a one time shot in the arm. A subsidy is an ongoing payment, and an investment is something you expect to get your money back on.

    Suppose Kaine provided help that induced the mattress company to locate here, when they might have been manufacured elsewhere more economically.

    Who are the losers? The people who buy more expensive mattresses as a result. The people who paid additional taxes to provide the incentives.

    Who are the winners? thaose that got jobs (or better jobs) they wouldn’t ordinarily have. The people who won property near where the jobs are.

    The winners will now pay more taxes than before. Is it more than the extra amount paid by those that provided the incentive?

    If you draw the system boundary at the global level, and take in the costs of everyone who buys a more expensive mattress, then this is probably a bad deal, generally speaking. But the transaction costs involved in making all the losers well are probably prohibitive.

    But at the state level it might be a good deal. Those that paid the excess taxes might have paid even more, if all the mattress workers remained unemployed. Ideally, those that paid the additional tax would get reimbursed, but again, the transaction costs are probably prohibitive, so you just let the black box do its job.

    Rather than do a total cost analysis, you just do enough to decide whether some kind of reimbursement scheme is worthwhile.

    Besides that, there is another level of competiton going on: between all the entities offering incentives. Even if you think incentives are inherently bad, only the best ones will get made.

    If I have a coupon for ten% off from my local hardware, I’m still not buying if it is 20% less at Walmart.

    Finally, the Polish manufacturere has decided to build a new plant. new jobs are going to be created somewhere. It is not the same as if we were paying to move an existing plant. Even if we did that, the question is “Who owns the jobs?”

    It is the manufacturer who owns the jobs, unless he has a job security agreement with his workers. If we pay him to move his jobs here, that is a legitimate and competitive transaction, since we are competing wtih other jurisdictions who want the jobs.

    Suppose he has a job security agreement. We induce him to move the plant here, and he brings the workers with him. The point being that when we buy something we need to be certain about what is included and what is not.

    You do not have any property rights over something you have not paid for.


  3. Anonymous Avatar

    Anonymous from the post below points out that emigration should be a universl right.

    In this case, the real externality is caused – by borders. Otherwise people would be free to move to any job, and sell their job skills on the open market.

    Asking the question of whether this is good for Viginia is an oblique way of pointing to the cause of the problem.

  4. I’ve read some Republican apologist material before but this takes the cake. Recessions are good for poor people living in mill towns because the recession weakens the dollar which slows imports and accelerates exports. Too bad there are presidential term limits – think of how happy and prosperous people would be if we could only have another 4 years of GW’s massive government spending and gigantic defecits. Maybe we can even start another morally and financially catastrophic war to further help the poor in Virginia mill towns.

    Dream on.

    Recessions (or economic slowdowns) hurt everybody but the hurt the poor the most. The drop off in sales to the US consumer will not be offset by sales to foreign consumers. It may help lessen the pain but it will not cure the disease.

  5. Jim Bacon Avatar

    “Republican apologist material?” What? “Recessions are good for poor people living in mill towns?” Huh?

    Groveton, you’ve gone off the deep end this time. I never said recessions were good for anybody, much less poor people. Never hinted at it. I said that the declining value of the dollar has real-world consequences here on the ground in Virginia, not just in the ether where currencies are excahnged, and that we need to think about them.

    (1) The shift in global trading patterns could offset the need to build massive highway infrastructure in Hampton Roads. Do you argue with that?

    (2) The economic downturn *may* not be as bad as feared if exports continue to surge. Do you argue with that?

    (3) A weaker dollar could make the U.S. manufacturing sector more competitive. Do you argue with that? Do you deny that the economies of Virginia’s mill towns have been eviscerated by the decline in manufacturing? Do you deny the fact that Danville just landed 800 new jobs?

    I didn’t talk about recessions, or Republicans or George W. I didn’t say that the drop in consumption would be offset by the increase in exports. You read those conclusions into my post with no justification whatsoever. Shame on you! I have come to expect much more rigorous thinking from you, Groveton. I suspect that you dashed off your comment in haste.

  6. “A newly competitive U.S. manufacturing sector is very, very good news for Virginia’s mill towns, which have seen their manufacturing-based economies hollowed out for some three decades now.”.

    And it’s newly competitive because…

    The dollar is weak because we have a weak economy?

    The dollar is weak because we have a huge spending deficit?

    The dollar is weak because we have low interest rates vs. other “safe” countries?

    The dollar always weakens in a downturn / recession?

    In my opinion, the weaker dollar is a symptom of a lousy economy and incompetent policies on the part of government.

    I do argue with the notion that surgung exports will lessen the downturn. The dollar always weakens in a recession. Exports always increase. This is built into the forecasts, it is not a surprise.

    A weaker dollar is a small part of what makes the US competitive (or uncompetitive) in exporting goods and services. And it is a hopefully temporary matter. What happens if the weak dollar is permanent? What happens to the US if foreign investors stop buying dollar denominated government debt? What happens if the petrodollars become petroeuros? Or euro dollars become euroeuros? What happens if asians decided they’ve had enough of teh weak dollar and stop buying and holding US treasuries?

    Saying that a weaker dollar is good for mill towns is like saying that a peson with the flu looks healthy because they have rosy cheeks.

    Why is the dollar weak? And are the reasons for that weakness really good for anybody in the United States?

    I’ll admit to being over the top on the Republican apologist comment if you’ll admit to publishing an article with a very superficial view of the causes and consequences of a weak dollar.

    And certainly basing infrastructure decisions on currency exchange rates is debatable at best.

  7. Larry Gross Avatar
    Larry Gross

    well.. the truth hurts sometimes.. doesn’t it?

    It’s a good thing we got a Republican like McCain running.. he’ll know what needs to be done.. right?


  8. Jim Bacon Avatar

    Groveton, n the value of the dollar.I’m not aware of any economic theory that correlates the strength or weakness of a nation’s economy with the value of its currency. There have been periods in which European nations with weak or stagnant economies ran strong balance of payments surpluses and maintained strong currencies.

    In the long run, currency rates are set by supply and demand. For decades now, overlapping Democratic and Republican administrations, the U.S. balance of payments deficit has widened year after year. The last time I checked the numbers, it was running around $800 billion a year.
    A country as large and dynamic as the United States can absorb those deficits for a long time — and we have. But at some point, the number of dollars being held by foreign banks and foreign traders becomes so enormous that they do not want to continue accumulating dollars at the same rate as in the past. At some point the balance-of-payment deficits become unsustainable.

    You can blame Bush II if you want. But the pile-up of foreign trade deficits has been with us since the Reagan administration (when I first started paying attention) and probably precedes Reagan, and continued through Clinton and both Bushes. It is driven by two things: excessive consumption and borrowing in the U.S. (primarily consumers, and secondarily the federal government — so, yes, you can blame George W. for that small fraction of the problem) and also by mercantalist policies of Asian countries that stimulate economic growth through under-valued currencies and exports. Go ahead and blame George W. for the economic policies of the Chinese government if you want to, but I don’t think you find many people agreeing with you.

    (By the way, I’m not “defending” the Bush administration’s economic policies. Fiscal policy has been a disaster. I’m simply saying that the declining value of the dollar is much bigger than U.S. fiscal policy.)

    As for the connection between the weak dollar and manufacturing competitiveness. The value of the dollar is only one factor affecting U.S. manufacturing competitiveness. The most important factor is the productivity of U.S. factories and the U.S. workforce, and the capacity of U.S. companies to innovate new products. I’ve spilled a lot of digital ink making those very points. However, the strength of the dollar is undeniably a factor as well. That is economics 101. Hypothesis: A weaker dollar will make U.S. products more competitive vs. foreign products both in the U.S. market and overseas. Hypothesis confirmed: The dollar has declined in value and, lo and behold, U.S. manufacturing exports have increased.

    As for mill town workers being better off in a recession, I’ve never made such a claim. Such a conclusion cannot remotely be construed from my statements. Obviously a weaker dollar has a downside. It means U.S. consumers have less purchasing power. So, all Americans are worse off when the cost of foreign goods (oil foremost among them) increases. I never said that a weaker dollar was a good thing. I said only that there are implications for public policy that we need to consider.

    As for basing infrastructure decisions on currency exchange rates… you think it’s a good idea to ignore the fact that the dollar has declined in value, and the possibility that decades-long global trading patterns may be changing?

  9. Larry Gross Avatar
    Larry Gross

    somewhere back there… I thought that before, after or during Monica that the budget did get balanced or is that just nasty revisionist history?

    and now.. it seems like our fiscally conservative folks are saying that as long as we have a righteous neverending “war” on wild-eyed American hating suicide
    bombers that it’s just fine and dandy to not only have huge deficits but to forgo health care and infrastructure for our own folks also as part of the sacrifices necessary to prevail.

    In other words.. we must not be distracted by economic realities while we dispatch the bad guys…

    or am the only one who thinks this?

  10. Jim Bacon Avatar

    Look, there is no question that due to the collapse of the Internet bubble and ensuing recession, the 9/11 attack and its impact on business confidence, profligate spending by a Republican Congress and spending on a military response to 9/11 (Afghanistan, which most people believe was justified, and Iraq, which most people now believe was not) that the U.S. has shifted from a budget surplus to a budget deficit. No argument there. But the U.S. has run significantly larger budget deficits (in relationship to GNP) and significantly larger military budgets (in relationship to GNP). While U.S. deficit spending is unquestionably a contributing factors to the U.S. balance of trade deficit, it doesn’t tell the whole story. Our balance of trade numbers continued to worse through the Clinton years, even when we were racking up budget surpluses.

    A far bigger story is the massive indebtedness binge of the U.S. consumer, driven by second mortgages, credit cards and other forms of credit innovations, as well as the mercantilist policies of the rising Asian economic powers that suppress domestic demand and promote exports to drive their economies forward.

    I am not trying to “defend” the Bush administration. I will repeat, I am utterly dismayed at the administration’s lack of fiscal discipline. And I’m certainly willing to concede that the war in Iraq surpassed even the most pessimistic projections of what it would cost to prosecute. Rather, I am seeking clarity on what drives swings in global patterns of trade and investment, and what drives long-term currency swings.

    Larry and Groveton are entitled to loathe George W. all they want. Many people do, and not without reason. But trying to pin him for the blame of massive structural trade imbalances that transcend the policies of any single U.S. administration and that are attributable in large measure to the policies of other nation states does no useful service. If you truly believe that “it’s all George W’s fault,” then you’ll believe that getting rid of George W. in a year will make the problems all go away. Trust me, they won’t go away. Indeed, many of the alternative policies his supplanters have articulated — more trade protectionism, more spending on social programs, higher taxes, more anti-business rhetoric — are not calculated to address the underlying problems.

  11. Jim Bacon Avatar

    Correction for my comment above: Where I referred to the “balance of trade” deficit, I meant to say “balance of payments” deficit — a very different thing.

  12. Anonymous Avatar

    Jim, the cause of the account deficit is the fixing of the exchange rate between the Yuan and the dollar by the Chinese Government. Excessive consumption and borrowing are results of that policy due to under-priced Chinese goods and lower interest rates due to the purchase of treasuries for balance of payments.

    The issue with government policy from Reagan to Bush to Clinton to Bush is that early on the mercantile policies with the Chinese were to get them to liberalize and jump start their economy. As that has happened significantly in the late 90s and even more so in the 00s, policy hasn’t changed to reflect Chinese growth and development.

    The lack of governmental leadership in ending the mercantile policy of China is where Bush II and lesser so Clinton are at fault. There are plenty of fairly simple trade or monetary policies that can be utilized to break the fixed rate that haven’t even been debated in the government.

    It is true that an economy can grow with an account deficit, but it is a drag on growth and has long term issues. Utilizing an account deficit can work to help a developing country, but is dangerous with a large economy. What’s essentially happening is we are trading equity for current expenses and debt, not sustainable in the long run.


  13. Larry Gross Avatar
    Larry Gross

    “What’s essentially happening is we are trading equity for current expenses and debt, not sustainable in the long run.”

    .. at the behest of elected leaders who have the gaul to call themselves fiscal conservatives

    .. we’ve suspended fiscal reality by saying that achieving victory over terrorists (whatever the hell that means).. means we can pretend that deficits and spending don’t matter.

    we take Iraq and Afghanistan “off budget”.

    What the heck does that mean?

    Hell.. why don’t we just take transportation and health care off budget while we are at it?

  14. Darrell -- Chesapeake Avatar
    Darrell — Chesapeake

    I’ve been reading the economic history of the great depression. The similarities are striking. Change the name Hoover for Bush, and the term tariff for depreciating dollar, and the setup is in place. The problem is, Obama isn’t FDR.

  15. Anonymous Avatar

    If you have NO borrowing, you are not growing as fast as you can.

    If you have too much borrowing, you put the enterprise at risk.

    Everything has a trade-off.


  16. Larry Gross Avatar
    Larry Gross

    see… if the government gave subsidies to people who wanted to borrow – then we’d have less borrowing and that would be a good thing.. .right?

  17. Anonymous Avatar

    Less borrowing is not necessarily a good thing.


  18. Larry Gross Avatar
    Larry Gross

    well that’s easy.. you just figure out what the right amount is and adjust the subsidy accordingly – right?

  19. Jim Bacon Avatar

    From a Feb. 5, 2008, speech by Jeffrey Lacker, president of the Federal Reserve Bank of Richmond:

    “Exports are likely to remain a source of strength next year, however, as a weaker dollar and continuing growth abroad support demand for U.S. goods and services. Accordingly, I expect the trade deficit to continue to narrow, providing modest support to real GDP growth.”

    Case closed.

  20. Anonymous Avatar

    “you just figure out what the right amount is and adjust the subsidy accordingly – right?”

    Exactly. Only one level of subsidy offers the maximum benefit, without becoming an undue subsdiy or wealth transfer to one side or the other.

    Nothing to it. Now all we have to agree is how to figure out what the right amount is at any given time, and when to adjust it.


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