The U.S. trade deficit climbed 6% in March, according to numbers out from the Commerce Department. But the widening trade gap, the highest since June 2010, may not be as worrisome as it seems. Much of the jump has to do with the recent uptick in oil prices, which makes the U.S. bill for oil imports more expensive. But if you take oil prices out of the equation (since they don’t really say much structurally about what’s going on with U.S. trade), things look a lot better.
In fact, when it comes to trade with manufacturing-heavy countries like China, in some ways the uptick in oil prices actually plays to the U.S.’s advantage. Even though the trade gap widened, U.S. exports grew at a record 4.7%, their biggest month-over-month gain in 17 years, while the trade deficit with China dropped by 4%. That’s because increased trade with China is driven by exports of U.S. services like insurance, banking, and education (in other words, Chinese families sending their children to U.S. schools), which are far less commodity-intensive than the factory-churned goods that give China its competitive export advantage. The steep rise in commodity prices also helps U.S. export competitiveness by increasing pressure on China to use the yuan’s value to fight inflation, a tool it has so far dismissed due to fears it may tank China’s export machine.
The weakening dollar also advantages the U.S., since it makes Chinese goods more expensive in yuan terms. That’s welcome news after the big pow wow between Chinese and U.S. officials that ended today, since China didn’t budge on U.S. pleas to let its currency appreciate more rapidly against the dollar.
Of course, too much Chinese inflation is not good for the U.S., because it eats at Chinese household income, which leaves less cash for Chinese citizens to buy U.S. educations and financial products. Ryan Avent notes this on the Economist‘s Free Exchange blog:
“there seems to be some sense across the rich world that emerging market consumption may power advanced-country growth while debt levels are brought down. But if emerging markets are doing serious battle with inflation, this belief may prove mistaken, and austerity may be more of a drag on growth than estimated.”
Indeed, U.S. trade with China is not a zero sum game. U.S. exports depend on the ability of U.S. companies to access financially secure Chinese consumers. The progress U.S. officials made during the U.S. and China Strategic and Economic Dialogue — better access to Chinese business deals and intellectual property protection — will only work if Chinese consumers continue to buy what we sell, and that requires tough structural reforms on both sides. A weak dollar and high oil prices alone won’t cut it.