U.S. Trade Deficit Hits Record... Again

The Commerce Department reported this morning that the U.S. trade deficit has hit yet another record high, despite the weakness of the U.S. dollar that should be making foreign imports more expensive here and U.S. exports cheaper overseas.

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The difference between the value of a nation's exports of goods and services and its imports of goods and services is roughly its "current account." If more money flows out through domestic purchases of imports than comes in through foreign purchases of exports, the country runs a "trade deficit."

  Some observers have accused the Bush Administration of ignoring the weakness of the greenback in the hopes that a boost in domestic export industries would help the American economy at a time when other sectors have been showing weaknesses because of rising interest rates and costs of energy. Today's figures show that the plan isn't working: the trade gap in February rose to more than $61.0 billion, about $2.5 billion worse than the revised January red-ink figure. Analysts had projected a more modest increase in the trade deficit, once again indicating that certain forecasters continue to believe that the U.S. economy is faring better than it actually is in many sectors.

The driving factor behind the trade deficit in February was the skyrocketing cost of imported oil. Even though less oil by volume was purchased in February, the increase in price per barrel overwhelmed the decline in quantity demanded.

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A country maintains an artificially low exchange rate of its currency for another by continuously entering currency markets to purchase the target currency with its own. Demand for the target currency is artificially strong, causing its value to rise, and supply of the pegging currency is unusually large, causing its value to sink.

  But even though OPEC got its share of the record number of dollars pouring out of the United States, imports from China continued to be responsible for the largest single magnet for greenbacks heading across the border. Although the U.S. trade deficit with China narrowed somewhat, at almost $14 billion in the red, it still ran well more than twice the $6.3 billion trade deficit the U.S. ran in February with the entirety of OPEC.

This is sure to add fuel to the continuing complaints in some circles that China's long-standing policy of maintaining an artificially low exchange rate of yuan for dollars has been the real culprit behind American trade deficits all along.

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The Chinese manage to maintain an exchange rate of 8 yuan to the dollar. By some estimates, the "unpegged" exchange rate might be closer to 2.5 yuan to the dollar.

  Others would argue that, were China not pursuing its global markets-distorting fixed exchange rate policy, exchange rates of other countries would merely adjust to maintain the same overall pattern of global flows of greenbacks and the goods that are sold for them. The federal government of the United States—as well as other governmental authorities and private parties—needs to borrow massive amounts of money to finance operations, so a ready source of dollars for such lending activity must exist. The argument goes that, in the absence of adequate pools of lendable savings within the U.S., exchange rates will adjust so that greenbacks are in the hands of foreigners who can then lend money to U.S. borrowers, by far the largest of which is the federal government, which has run a string of huge budget deficits during the Bush Administration.

By enacting a series of tax cuts that starved the federal government of operating revenues, and by coupling this with aggressive and rising expenditures on certain programs favored by the political party that controls the entire government, the Bush Administration has put the nation in the position of being an enormous and continuing source of demand for borrowed money, the majority of which has been provided by foreigners who gather the dollars to make those loans by selling their merchandise in the United States. Effectively, then, exchange rates tend to become positioned so that those willing to lend money get the dollars to do so, and those needing the loans get their money, along with a cheap, imported toaster.