A recent article in the Oregonian suggests the increasing trade deficit may be driven by imports. In the article "Trade Deficit Grows" reporter Martin Crusinger writes:
- U.S. residents' seemingly insatiable appetite for foreign goods pushed October's total imports to a record $129.7 billion, an increase of 2.1 percent from September.
Demand for foreign cars and auto parts rose by $1 billion to a new high of $18.4 billion. Retailers stocking their shelves with Hokey Pokey Elmo and other Christmas toys pushed demand for imported toys and games up $36 million, to $2 billion. Three out of four toys sold in the United States are foreign-made, and about two-thirds of them come from China.
- Imports from Canada up an average of 7%, American-Canadian exchange rate down an average of 10%
- Imports from Mexico up an average of 2%, American-Mexican exchange rate up an average of 12%
- Imports from Japan down an average of 2%, American-Japanese exchange rate down an average of 7%
- Imports from China up an average of 25%, no change in the exchange rate.
I would guess the the data is telling us something about the price elasticity of demand of the various countries goods. When the value of foreign currencies goes up, it makes those goods more expensive. The added cost of the goods will cause us to buy less of them, but the effect it will have on the total amount we spend on those goods is indeterminate. If we are not very sensitive to changes in price (goods with this feature are known as price inelastic) then we will buy almost as many as before, and our total expenditure on those goods will go up. On the other hand if we are very sensitive to changes in price (goods with this feature are known as price elastic) then when the price goes up we will buy quite a bit less of those goods and our total expenditure on those goods will decrease. Generally speaking goods we cannot do without, either because they are necessities or because we are addicted to them are price inelastic. On the other hands, goods that have a lot of substitutes or are luxury items are price elastic.
Americans buy a lot of consumer goods from Japan, which would certain fall under the "luxury" category. Total expenditure on Japanese goods has fallen, while the relative price of Japanese goods (because of the rising value of the yen) has increased, which would fit the "luxury" hypothesis. Mexican goods seem to be unit elastic where a large change in the price has caused little change in the total expenditure. Canadian goods, on the other hand, seem to be a necessity, as when the price of those goods went up by 10%, the total amount spent on those goods went up by 7%. I'm not sure that this is due to the fact that Canadian goods are necessary. It may be due to the fact that a lot of American firms have long-term contracts with Canadian firms and are thus locked into a situation where they cannot decrease the size of the orders that they place. The Chinese data is the most puzzling. It would appear that Americans have an increased desire to buy Chinese made products. I cannot find any data that would suggest that the price of these goods has gone up or down in the last two years. Such data would help us better understand the increase in Chinese imports.
In conclusion, the data does not seem to support any one particular theory of why the trade deficit remains so large. We can conclude the following:
- While the U.S. Dollar has weakened against many major world currencies such as the yen and the euro, it has remained strong against the Mexican and Chinese currencies, which belong to two of the four largest trading partners of the United States.
- U.S. international trade is dominated by Canadian-American trade, so any explanation of the trade deficit has to begin with an understanding of what causes changes to American-Canadian trading patterns.
