How a Weaker Dollar Can Mean a Bigger Trade Deficit

Tim Worstall, after leaving a semi-cryptic comment on my blog yesterday, explains himself in a bit more detail today. I was confused about how US net exports could deteriorate even as the currency was weakening, but it turns out that an initial deterioration is exactly what you'd expect in such an event. Says Tim:

It's not "despite" the dollar only getting weaker over the course of the quarter, it's "because" ditto ditto that export growth in cash terms is slowing even as imports in cash terms are rising again.

The point is that if the dollar is weaker, any given volume of imported widgets will be worth that much more in dollar terms, and it's only after the effects of that weaker dollar kick in (more widgets exported, fewer widgets imported) that you see the trade balance improve. This happens every time there's a new deterioration in the currency, like there was in the first quarter, although ultimately the more your currency weakens, the stronger your trade balance will eventually be.

Eventually of course the longer term effects overcome even a succession of J Curves and the trade balance comes roaring back.

As I fully expect the US one to, indeed, I'd be really rather surprised if in 5 years time the US wasn't running a trade surplus.

Yikes, a US trade surplus? Assuming that China too continues to have a big trade surplus, I guess that means that Germany would be swinging to a deficit.

Comments

[enviro111]

It will take a virtual depression in the United States to produce a significant trade surplus. Price is only part of the reason for trade balances. The ability to produce goods has rapidly dwindled in the US in the past 15 years. People don't remember or know how to produce. Its all about consumption and spending and light weight services (i.e., real estate trading, hair and nail cutting, general entertainment, restaurants, legalism (sueing each other), meaningless education services, arcane banking services, and government processing (redistribution) of data and money.

The trade deficits will persist until much of this stuff is blown away and the people are back in the factory, in the mine, on the farm, or in the lab.

Also, in the US people actually seem to prefer foreign goods over domestic ones. Perhaps is because they no longer make very many of them. They don't appreciate the effort and skill required and quickly discount it. When you actually make a product you are more attuned as a consumer to buying other products made by your countrymen.

[JREB777]

The real trade surplus will come from a cheap dollar, US recession.
There is no magic bullet in this game.
For those that believe that China will be pulling the US out of this slump, I suggest they go there and take a look around.
They all live, work, save, and talk US business. 50% of everything being built, sold, or traded is in some way connected to the US economy.
So to all of you talking about economic disconnect etc. I suggest you invest a bit on a round trip ticket and go visit Zhenzhen, or the outskirts of Shanghai to see, feel and smell the consumer that will pull the us out of this mess.
Good luck.