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Trade deficit on course for surplus
Cheaper fuel helps cut costs for goods made in America
While Washington wrestles with the nation’s burgeoning budget deficits, some good news has emerged on the other deficit front: The nation’s bloated trade deficit appears to be turning the corner, with at least one prominent economist predicting it will disappear altogether within a decade.
A recent wave of “re-shoring” of overseas manufacturing plants by U.S. chemical, auto and other companies signals the revival of U.S. competitiveness in many industries vis-a-vis Europe, Japan, China and other major trade partners. The trend got a big push recently from a dramatic drop in American natural gas prices, making the U.S. a highly desirable location for manufacturers relying on gas for energy and as a component in plastics, chemicals and other essential materials.
Rising U.S. competitiveness has stoked a major export revival since 2009, helping pull the economy out of recession. Many analysts have been surprised by how well exports have held up this year despite the slide back into recession of the largest U.S. export market — the 17-nation eurozone — and a major slowdown in the nation’s fastest growing market — China.
The export revival owes to a constellation of U.S. trends that have been building for years, including a pronounced weakening of the dollar against other major currencies, high productivity growth and subdued wage increases, and rising fuel and transport costs that make it more expensive for manufacturers overseas to deliver goods to customers in the U.S. American farmers also are helping the balance of trade by becoming beneficiaries for rising living standards in China and other emerging countries, driving farm prices to near-record levels.
On the import side, there has been a trend toward saving more and spending less among U.S. consumers and a dramatic reversal of U.S. energy consumption and production trends since 2005 that has put a lid on American oil imports and promises to turn the U.S. into a net energy exporter in coming decades. America’s gigantic oil deficit has been second only to the gargantuan trade deficit with China as a major driver of chronic U.S. trade gaps that surged to more than $800 billion at their peak in 2006.
“The secular trend of the U.S. trade deficit is a great, positive story,” said David A. Levy, chairman of the New York-based Jerome Levy Forecasting Center. “The trade gap has been an enormous [drag on the economy] for over three decades. America may be only a decade from running consistent merchandise trade surpluses.”
Oil deficit on the wane
Trade deficits act like a dead weight on the economy by draining the wealth of the country and bleeding domestic industries. U.S. leaders have been worried about bloating deficits since the 1970s with a surge in oil imports from the Middle East.
The sea change in oil exports this year has been breathtakingly fast — narrowing the trade deficit in September to the lowest in two years as U.S. production of oil from shale formations in Texas and North Dakota led to a surge in petroleum exports.
“The revival in domestic oil production is narrowing the U.S. deficit” even amid a lull in manufactured exports brought on by the European recession, said Nigel Gault, an economist with IHS Global Insight. The current account deficit, the broadest measure of merchandise and service flows, fell 9 percent to a 31/2-year low of $107.5 billion in the third quarter, the Commerce Department has reported, and IHS expects it to stay in that low range or even make further progress next year despite the global slowdown.
While the federal government could play more of a role in boosting exports through tax reform and training assistance, business groups say, some industries are already staging a comeback without help from Washington, thanks to improving trends in the marketplace.
Petrochemical companies such as The Dow Chemical Co., Royal Dutch Shell PLC, Chevron Phillips Chemical Co. and Exxon Mobil Corp., which moved plants overseas a decade ago, are relocating to the U.S. and considering building plants here to take advantage of the lowest natural gas prices on the planet. Because chemicals and plastics are core ingredients for many other manufactured goods, this trend promises to coax even more manufacturers to locate in the U.S.
“The boom in gas and unconventional oil extraction may generate a significant number of new jobs,” said Dieter Ernst, an economist with the East-West Center. “It reduces one of the main cost factors for petrochemical products such as plastic, which could accelerate investment in a broad range of domestic industries.”
A report from the National Intelligence Council this month said that the lower gas and oil prices in the U.S. brought on by the shale boom would have “significant positive ripple effects” for the U.S. economy, possibly increasing jobs in extraction and manufacturing industries by as much as 3 million by 2030, while helping to “significantly reduce” the trade deficit.
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