Trading relationships among thousands of individuals and companies across international borders are complex. The political process attempts to boil down these complex relationships to just a single number like the trade balance in goods and services or the growth in imports or exports and then attaches a label of good or bad. The standard Mercantilist mentality of the past two hundred years assumes that imports are bad and exports are good. Both exports and imports are good for the economy because producers and consumers are pursuing their economic best interests in the marketplace.
The most overused trade statistic is the trade deficit in U.S. goods and services reported each month by the Bureau of Economic Analysis of the U.S. Department of Commerce. The U.S. trade deficit was $64.8 billion for June 2006, the most recent month available, $0.2 billion less than in May and up $6.4 billion from June of 2005. For calendar year 2005 the deficit in trade of goods and services was $716.7 billion, up $105.4 billion from calendar year 2004.
A trade balance is a combination of some level of exports and imports. Exports have been growing at double digit rates over the last couple of years. Exports of goods and services in June 2006 were $120.7 billion, up 13.9 percent from June of 2005; June 2005 exports were up 12.5 percent from June 2004 exports. That does not match with arguments that U.S. exporters have lost their competitive edge due to high labor costs, the value of the dollar, unfair trade practices or similar reasons.
About 70 percent of U.S. exports are goods and the other 30 percent are services. A general assumption has been that the U.S. is more competitive in services than in goods, but that is not clear from the recent numbers. Exports in services were $34.2 billion in June of 2006, up 8.2 percent over June of 2005; June of 2005 was up 10.9 percent over June of 2004. Exports of goods were $86.6 billion in June of 2006, up 16.4 percent over June of 2005; June 2005 was up 13.4 percent over June of 2004.
Monthly imports have been growing at a faster rate than exports in dollars, but at a slower rate on a percentage basis. Imports of goods and services were $185.5 billion in June of 2006, up 12.8 percent from June 2005, which were up 10.3 percent from June of 2004. As with exports, imports of goods (which accounted for 82 percent of imports in June 2006) grew at a faster rate in June 2006 at 13.4 percent compare to services at 9.6 percent. The U.S. had a trade surplus in services of $5.6 billion in June of 2006.
The import numbers are partially skewed by the rapid increase in the price of petroleum and petroleum products. In June of 2006 petroleum and product imports were $27.3 billion, up $7.1 billion from June 2005. That increase is almost 40 percent of the $18.6 billion increase in value of imported goods from June 2005 to June 2006. If the dollar value of petroleum imports had remained unchanged in June 2006 compared to June 2005 at $20.2 billion, goods imports would have increased by 8.3 percent rather than the actual 13.4 percent increase.
Trade in capital goods is often considered an indication of the technical capabilities of a nation’s manufacturing industries. In June of 2004 imports of capital goods were $29.2 billion compared to exports of $26.8 billion, a difference of $2.4 billion. In June 2005 the difference had narrowed to $2.0 billion with imports of $32.3 billion and exports of $30.3 billion. In June of 2006 exports increased to $34.9 billion, while imports grew to $34.6 billion. According to the U.S. Trade Representative’s office, exports account for one out of every five manufacturing jobs.
The difference between imports and exports continues to be wide in consumer goods. In June of 2006 consumer goods imports of $36.8 billion exceeded consumer goods exports of $10.8 billion by $26.0 billion, 40 percent of the total deficit in trade of goods and services. Apparel and cloth household goods led consumer imports at $7.8 billion. Pharmaceutical preparation imports were $5.7 billion, but that was partially offset by exports of $2.3 billion. Other items high on the consumer goods import list included TVs, VCR, etc at $3.5 billion, toys, games and sporting goods at $2.2 billion, furniture at $2.1 billion and other household goods at $4.1 billion. If the trade deficit in consumer goods did not exist, U.S. consumers would be worse off because they would be paying higher prices for products made in the U.S. and/or consuming less of those products.
Differences in trade flows are balanced by flows of capital. Some economists argue that trade flows are driven by capital flows that must be balanced by trade flows. Since the U.S. has attracted capital for years for direct investment in productive assets and purchases of government and private debt, a deficit in trade in goods and services occurs to offsets the capital flows. The trade deficit could be reduced by making the U.S. a worse place to invest by raising taxes and increasing regulations on businesses or by simply having government policies that restrict foreign investment. Reducing foreign investment in the U.S. would result in fewer jobs created and lower pay for workers because of slower productivity growth.
Government policies can impact imports and exports, both in the short run and in the long run. That is why sound monetary policies and trading rules in the WTO and regional and bilateral trade agreements are important. Producers and consumers acting in the marketplace ultimately decide the level of imports and exports. That makes good economic sense regardless of calculations of the balance of trade.