The U.S. trade deficit reached a record of an estimated $600.6 billion in 2004, significantly affecting the U.S. economy, including the construction industry.
In October 2004, the last month for which figures are available from the U.S. Department of Commerce (USDOC), imports of goods and services into the United States reached an all-time record of $153.5 billion. U.S. exports also reached an all-time record of $98.1 billion. The monthly trade deficit was thus $55.4 billion — also the highest in history for a single month.
“Annualizing the monthly deficits through October, we’re looking at a total trade deficit in the ballpark of $600.6 billion in goods and services for the past year,” said Nick Orsini, a spokesperson of the U.S. Census Bureau (which analyzes trade data for USDOC) in Suitland, MD. “This compares with about $496.5 billion for 2003.”
The deficit wave has been higher each year since the millennium started.
“The trade deficit went down a little from 1989 to 1995, but then it started climbing again and has been growing really incredibly for the last five or six years,” said Janet Shapiro, supervisory statistician of the U.S. Census Bureau’s Foreign Trade Division in Suitland. “Even though our exports have grown to a new record, imports have grown even faster.”
Will the Wave Break?
The trade numbers show the difference between exports and imports each year, but the annual U.S. deficits don’t keep accumulating.
“It’s important to realize that the trade numbers are really a balance,” Orsini said. “It’s not as if we are borrowing this money from someone. The numbers simply indicate what is entering the U.S. vs. what is leaving the U.S. and measure the value of that merchandise. We are not in debt by $600 billion. It’s a little different from the federal budget debt, which we finance partly by selling bonds to foreign countries. It doesn’t work that way with the trade deficit, which is like a balancing scale, where the imports are much heavier than the exports.”
There are, however, worrisome signals. The growing deficit is tied in with the steadily weakening dollar and rising interest rates. Foreign countries — especially China and Japan — have been buttressing the U.S. economy, and our purchases of their goods, by investing many billions of dollars in U.S. corporate and Treasury bonds. These investments have been slowing.
One of the effects of the trade deficit is that it tends to weaken the U.S. dollar.
Just try getting a hotel room in Europe and you’ll see how many more dollars you now need to buy something overseas.
If one is selling equipment or other goods, however, the weak dollar is helping.
“The falling dollar makes for more more-attractive pricing of U.S. products, so we’re seeing an increase in U.S. exports over last year,” said Nick Yaksich, vice president, government affairs, at the Washington, D.C., office of the Association of Equipment Manufacturers (AEM).
Why the Dollar Weakens
Construction Equipment Guide (CEG) asked industry sources to shed light on the picture.
“The weak dollar is partly due to supply and demand and the availability of currency,” observed Christian A. Klein, Washington, D.C., counsel of the Associated Equipment Distributors (AED). “A trade deficit is created when we buy more goods from other countries than they buy from us. We need more of the foreign currency to purchase these goods than they need dollars for their purchases. The value of the dollar goes down because there’s less demand for it.”
William Buechner, vice president of economics and research of the American Road & Transportation Builders Association (ARTBA) in Washington, D.C., explained it this way, “If we want to purchase something in Europe, Japan or China, we have to offer dollars in exchange for their currency. If we’re buying more from them than they’re buying from us, then we are offering more dollars to buy a scarce supply of their currency. There’s an over-supply of dollars and an over-demand for foreign currencies [as imports increase over exports]. The price of the foreign currency goes up in terms of U.S. dollars and the dollar goes down in terms of foreign currencies.”
In classical economics, a weak dollar helps exports, like construction equipment, because foreign currencies, and buyers, have more purchasing power, and discourages imports, because the dollar, and U.S. buyers, have less power.
However, the new global trade picture hasn’t followed that scenario. Imports have kept growing, not only of petroleum products but also things like computers,
“A weaker dollar is supposed to make foreign goods more expensive for the U.S., so you would think you would see a decline in imports, narrowing the trade gap, but that hasn’t happened,” Orsini said. “While exports are showing some good signs, imports are also continuing to rise to out-of-sight levels. People are still importing. You have to take into account, of course, that a large part of our imports have been petroleum.”
Interest Rates Rise
The trade deficit also exerts upward pressure on interest rates.
“If you have a large trade deficit, as we have, there are only two options,” Buechner said. “One is to let the value of the dollar fall, in which case foreign products in the U.S. become more expensive and U.S. products abroad become cheaper, with the trade deficit eventually vanishing. As prices of foreign, and competing U.S. products go up, this contributes to inflation and higher interest rates.
“There’s a second option. If the Fed [Federal Reserve] doesn’t want the value of the dollar to fall that much, it can raise interest rates to attract more foreign investment. We have to make investment here more attractive than in their own countries, and that only happens if interest rates are higher here. We’re actually selling notes to foreign investors, who are lending us the money by investing here.”
Higher interest rates, of course, have plenty of downside. They discourage the residential home building market, make renting equipment more expensive, and dampen borrowing for business enterprises, including construction projects.
“The rate increases by the Fed so far don’t seem to have been enough to materially impact things like mortgage rates,” Buechner said. “Eventually, increases would have an adverse effect.”
“The rising trade deficit certainly is a concern,” Buechner said. “Whenever you consume more than you produce, or buy more than you sell, you run up a debt. As long as foreign countries are willing to invest here, that’s fine, but at some point they are going to want their money back. Then we will have to make some pretty hard adjustments.”
AEM’s Yaksich said, however, that the deficit isn’t yet a cause for great concern.
“People are adapting to fluctuations of a global economy,” he said. “The focus is on worldwide demand for products. There would be concern if demand fell, but right now it’s high worldwide. Some equipment manufacturers are hurt by the deficit, but others benefit from it.”
In total value, our largest exports during 2004 were in capital goods ($274.715 billion through Oct.) with the leading products being semiconductors, computer accessories, telecommunications equipment and civilian aircraft. The value of exported automotive vehicles, parts and engines, which Commerce treats separately, was $73.018 billion through October, much higher than any of the above products.
The second largest category of U.S. exports was the industrial supplies and materials area ($167.266 billion through Oct.). Here the leading products were organic chemicals, plastic materials, other chemicals, and petroleum products.
Our third largest export area was consumer goods ($84.483 billion through October), particularly pharmaceutical preparations ($2.175 billion).
Foods, feeds and beverages were fourth ($46.350 billion through Oct.), with corn being the leader, followed by soybeans, wheat, and meat.
Our leading imports, in terms of value through October 2004, were industrial supplies and materials ($333.667 billion). Crude oil, of course, was by far the largest single product ($104.889 billion), followed by natural gas ($19.478 billion), other petroleum products ($18.937 billion), iron and steel mill products ($13.162 billion), organic chemicals ($12.494 billion), and a long list of other products from shingles/wallboard ($9.675 billion) to finished metal shapes, lumber, plastic materials, bauxite and aluminum, liquefied petroleum gases, iron and steel products, stone/sand/cement, tobacco, chemical fertilizers, and paper.
Consumer goods were the second largest import area ($306.314 billion through October 2004). The leading products were pharmaceutical preparations, cotton apparel and household goods, other household goods, TVs and VCRs, other textile apparel, toys/games/sporting goods, furniture, and diamonds.
Imports of capital goods also were huge — $282.735 billion through October 2004.
Computer accessories were the largest single import in this area ($52.818 billion), followed by telecommunications equipment, electrical apparatus, semiconductors and computers.
The United States imported $189.707 billion in cars, parts and engines through October 2004.
Imports of foods, feeds and beverages totaled $51.106 billion through October, with the top commodities being meat and wine.
Top Trading Partners
Our top trading partners for exports of goods were Canada (23.2 percent of total through October 2004), Mexico (13.5), Japan (6.7), the United Kingdom (4.4), China (4.2) and Germany (3.8).
Top partners for imported goods were Canada (17.6 percent of total), China (13.2), Mexico (10.7), Japan (8.8), Germany (5.3), and South Korea (3.2).
“The picture has changed somewhat,” said Shapiro, the Bureau of the Census statistician. “We used to be concerned about Japan [trade imbalance]. Now people are concerned about emerging nations in a global economy. We’re doing a lot of trade with Brazil now, also with India. We now import more from China than Mexico.”
The Chinese Tiger
Census figures show that the United States imported $159.6 billion in goods from China through October 2004 and exported $28.5 billion. This year’s trade imbalance was thus $131.1 billion through October.
The following leading imports from China in 2003 were: Toys, shooting and sporting goods, and bicycles ($16.557 billion), computer accessories and parts ($16.095 billion), apparel and household goods from textiles other than wool and cotton ($8.342 billion), furniture, household items, and baskets ($7.850 billion), footwear ($7.782 billion), computers ($5.918 billion), TV receivers, VCRs and other video equipment ($5.758 billion), household and kitchen appliances ($4.691 billion), radios, phonographs, tape decks and other stereo ($4.120 billion), telecommunications equipment ($3.751 billion in 2003), electrical apparatus and parts ($3.483 billion), cookware, cutlery, house and garden wares, tools ($2.588 billion), and fish and shellfish ($1.146 billion).
In the construction area, U.S. imports of excavating, paving and other construction equipment from China totaled $87.4 million in 2003, almost twice the 1999 total. The United States also imported shingles and wallboard ($744.1 million), plywood and veneers ($175.4 million), and stone, sand, cement and lime ($762.8 million).
Our biggest individual export to China, on the other hand, is soybeans ($2.889 billion in 2003). (Adding together the different individual classifications of industrial machines, however, including metalworking, testing, pulp and paper and other types, produces a higher total, at least $3 billion.) These were followed by semiconductors ($2.447 billion), civilian aircraft ($2.148 billion), organic chemicals ($1.010 billion), computer accessories ($1.006 million), plastic materials ($933.5 million), telecommunications equipment ($916.4 million) and steelmaking materials ($710.9 million).
Exports of excavators totaled $149.8 million. Exports of computers to China totaled $264.5 million. TV and VCR exports to China totaled $129.3 million.)
Information on U.S. trade is available on www.census.gov under foreign trade.
(This story also can be found on Construction Equipment Guide’s Web site at www.ceg.ltd.) CEG