The yearly U.S. trade deficit peaked at 6.4% of GDP in August 2006. It improved significantly after the financial crisis, bottoming out at 3.6% in January 2010. This swing provided a boost to GDP and nudged the U.S. external balance toward a more sustainable level. The deficit then resumed an upward march, reaching 4.3% by November. A closer look at America’s bilateral trading relationships since the deficit high-point in 2006 reveals a significant improvement with many countries, and only a small deterioration with a few others. China – with which the U.S. has its largest deficit – is the conspicuous exception, as the figure shows. 2011 looks set to be a year of yet further-rising trade tensions between the two countries. Read more »

Turkey’s exports to the Middle East have grown substantially over the last three years, particularly to Iraq, Egypt, Libya, and Iran. In tandem, its share of exports directed to the European Union has declined. This shift is being driven primarily by the faster growth of Turkey’s Middle Eastern trading partners, but also by a conscious Turkish political decision to cultivate such ties. Prime Minister Erdogan recently said he expected a proposed preferential trade agreement with Iran to lead to a tripling of bilateral trade within five years. While the EU remains a major Turkish trade partner, its declining relative economic importance to Turkey can be expected to weaken its political influence over the country. Read more »

Over the past decade, trade between the United States and China has grown dramatically while also becoming significantly more imbalanced. The United States ran a bilateral trade deficit with China of over $225 billion in 2009, compared with a $69 billion deficit in 1999. One factor contributing to this imbalance is U.S. export controls on certain high-tech products deemed important for national security. As illustrated in the chart above, the United States now exports to China relatively less machinery and relatively more crude materials, such as scrap metal, than it did a decade ago. China’s president Hu Jintao has urged the United States to relax technology export controls for years. The Obama administration is starting to push to do just that, in line with its goal of doubling exports in five years. U.S. Secretary of Defense Robert Gates has bluntly observed that “America’s decades-old, bureaucratically labyrinthine [export control] system does not serve our 21st-century security needs or our economic interest.” Read more »

In his State of the Union address, President Obama set an ambitious goal of doubling exports in five years. To achieve this goal, exports must grow by nearly 15% annually, shown by the red line in the chart above. Since 1965, the only time such a nominal growth rate has been achieved for several years was in the mid-1970s. This growth was driven by high inflation, and was thus in large part a money illusion. In the early 1990s and late 2000s, export growth neared the 15% rate. As illustrated by the gray boxes, in each case the U.S. real exchange rate declined significantly during the period. Thus to realize his export ambitions, the president will likely need significant (and unwelcome) inflation or another major fall in the dollar – or both. Read more »

The U.S. non-oil current account balance started to improve in 2006 after a period of real dollar depreciation beginning in 2002. However, the overall deficit remained high, reflecting the run-up in oil prices. The deficit improved substantially after oil prices collapsed during the financial crisis. As the crisis recedes oil prices have started to rise and the dollar has resumed its fall suggesting the potential for a continued improvement in the non-oil deficit, but deterioration in the oil balance. The net effect is likely to be a worsening of the current account deficit. Read more »