- The Washington Times - Thursday, January 13, 2005

A weak dollar is supposed to be good for exports and the balance of trade. Some economists are claiming that maxim no longer applies because U.S. companies have become too uncompetitive. We think those experts misread events.

The weak dollar is partly a myth. True, the dollar has weakened considerably against some currencies, such as the euro and the Japanese yen. The dollar has barely moved, though, against the Chinese yuan and other Asian currencies. Unfortunately, growth and consumer demand in Europe and Japan has been sluggish, while growth in China and other parts of Asia where the dollar has been mostly steady. The U.S. economy grew 4 percent in the third quarter from a year earlier, compared with 1.8 percent in the countries using the euro and 2.6 percent in Japan. U.S. exporters, therefore, have not been able to benefit from a drop in the dollar because the currency has weakened, for the most part, in economically anemic countries. Growth in the United States, meanwhile, has driven the buying of imports.

That is the main reason why America’s trade deficit is reaching record numbers, with not only an increase in imports — which is to be expected given U.S. growth and high oil prices — but also a dip in exports. The Commerce Department said Wednesday the U.S. trade deficit in November widened to an all-time record of $60.3 billion. U.S. exports fell by 2.3 percent to a five-month low of $95.6 billion. Imports rose 1.3 per cent to a record $155.8 billion. The market had priced in an expected narrowing of the trade deficit, and investors sent the dollar lower in reaction to Tuesday’s trade numbers.

America’s trade deficit with China narrowed slightly to $16.6 billion from a record $16.8 billion in November but for the year, the trade gap with China is $147.7 billion, about one-fourth the U.S. deficit with all countries. Oil imports rose a considerable 17.7 percent in November to a record $14.2 billion.

The data, according to Nariman Behravesh, chief economist at Global Insight Inc., suggests that there is more weakness in global consumer demand than expected. The dollar may therefore have to fall even further, he said, for U.S. exports to start picking up. “When the dollar gets low enough, then we’ll get that kick,” he said. Low enough, he added, would be a further drop in the greenback of about 15 percent over the next two or three years. The dollar has already lost about 50 percent of its value against the euro over the past three years. Mr. Behravesh said he does not expect a hard landing for the U.S. economy.

A monetary tightening, though, could be in the offing. Fiscal policy is already expansionary, given the size of the budget deficit, and the wide trade deficit indicates that U.S. consumer demand remains strong and could trigger inflation. The drop in the dollar already makes imports more expensive to the U.S. consumer. So the Federal Reserve could decide to continue raising the benchmark interest rate.

The U.S. economy does have some visible vulnerabilities, such as the budget deficit. All the same, the primary causes of the U.S. trade deficit are sluggish growth (Europe), artificially maintained exchange rates (China) and, of course, the difficulties of American companies to compete with very cheap foreign labor. The first two of these parts are not factors that are connected with U.S. economic conditions or policies, and the last point is a topic for another day.

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